Desperate measures

New Delhi , April 13: The Congress-led government is in talks with the Reserve Bank of India (RBI) to ensure its efforts to rein in rising inflation does not curb economic growth.

The government is banking on lowering import duties and increasing export taxes besides raids on hoarders to increase the supply of food and other commodities, while the country’s central banker is keen to reduce money supply within the system.

This is because the RBI feels high growth rates and an unprecedented inflow of foreign exchange have resulted in a liquidity slosh, or a situation where too many rupees are chasing too few goods.

Traditional economics advocates sapping out excess liquidity from the economy to cool down price rise.

This week, the government through the RBI will conduct one of its biggest sale of bonds and other government-backed debt paper to reduce the supply of money in the financial system and temper prices. It will sell Rs 23,000 crore of debt stock, including Rs 9,000 crore of securities.

Officials said this in itself might not be enough to reduce money supply. Credit growth has been growing at around 25 per cent, and this is considered as quite high by economists.

Credit check

The fear is the RBI may look at other measures to curb credit expansion.

The officials said the finance ministry had been holding talks with the RBI ahead of the latter’s key policy statement which is expected on April 29.

It has been urging the central bank to hold the interest rate stable and look at other measures.

The ministry’s argument is of high interest rates hurting industrial growth, leading to the creation of a fewer jobs.

Bank interest rates are influenced by key policy rates of the RBI, which have been raised nine times since October 2004 to check inflation.

The officials said the RBI could look at raising the cash reserve ratio, or the amount of money banks must keep with it, to drain excess money and reduce credit flow. “One can expect some move from the RBI. It could look at raising the cash reserve ratio,” said D. Joshi, chief economist at credit rating agency Crisil.

CRR move

Already, the RBI has raised the cash reserve ratio five times since December 2006.

However, bankers, say this move has a limited impact on interest rates.

According to Amit Banerjee, a banking analyst, “Banks don’t raise interest rates if the cash reserve ratio is hiked but they tend to stop giving discounts to blue chip customers on the prime lending rates and curb lending to many borrowers who would otherwise have been given loans.

“It’s simply a question of credit supplies being reduced and banks assigning higher value to the loans they give out,” he said.

It is expected that inflation will be brought under control when the rabi crop comes into the market and raises the availability of farm items, the officials said. Vegetable prices alone went up over 4 per cent for the week ending March 29.

If the rabi crop cools prices, the RBI will get some leeway in deciding on the monetary measures that it will adopt in its fight against inflation.

Price review

Official data showed that the inflation rate remained at sub-four-per-cent level in 23 weeks and between 4 and 5 per cent in 16 weeks of the last fiscal.