New Delhi, Sept. 19: The finance ministry wants the Reserve Bank of India to inject liquidity into the economy by cutting the daily cash reserve ratio (CRR), while keeping the key rates unchanged.
The North Block’s expectations come on the back of a surprise breather given by the US Federal Reserve to emerging economies by deciding not to withdraw its bond buying programme.
CRR is the amount of money banks have to compulsorily hold with the RBI on a daily basis.
The RBI had asked banks to maintain an average cash reserve of 99 per cent of their requirements on a daily basis from 70 per cent to check the volatility in the rupee.
With the rupee appreciating from its all-time low of Rs 68.8 to the dollar on August 28 to Rs 61.77 today, economists with the government feel there is a scope for a CRR cut.
However, top finance ministry officials said the RBI might want to hold on to key policy rates as inflation continued to be a concern, especially because crude oil prices might go up now after the US Fed’s decision.
The officials also pointed out that the Fed might start tapering its stimulus later this year or early next year. Hence, there was a need to continue the curbs on imports along with the search for new markets and moves to buy foreign oil assets at reasonable prices.
“The surge in investments in emerging economies such as India is a positive and can result in a half-per-cent increase in our GDP, pushing the GDP growth back to 5.5 per cent for the year. But we need to work to see to it that we are able to hold on to the gains of this current reprieve,” the officials said.
The officials indicated that the steps taken to attract NRI dollars by raising deposit rates through the subsidisation of forex risks for banks should continue as there was a need to keep a reserve ready in case the tapering started later this year or early next year.
Economic affairs secretary Arvind Mayaram said it was business as usual for India and asserted that the government would continue with reforms.
“We should not overly put emphasis on the decisions of the Fed in the manner in which the economy will unfold. It is business as usual for us, as far as we are concerned,” Mayaram told reporters here.
“I think we will need to continue to deepen our own reform process so that we continue to strengthen the economy. We believe with the steps that the government has taken, the economy will continue to show signs of growth and that is what is going to strengthen the rupee and strengthen the markets,” Mayaram added.
JPMorgan Chase & Co said in a research note, “The Fed’s dovish tone does provide some breathing space, but that’s all it really is.”
“Recent history suggests that global risks can turn on a dime. We, therefore, expect the RBI to begin easing policy incrementally tomorrow but not be lured into a knee-jerk overreaction that could cause some nervousness in the foreign-exchange market,” the note added.