Apropos the edit on the Reserve Bank of India’s (RBI’s) announcement of a cut in the cash reserve ratio (CRR), one wonders at the rationale, if any, for the injection of Rs 170 billion into the system that will eventually become larger owing to the workings of the money multiplier (“RBI does minimum,” September 18). The RBI review admits that liquidity conditions have remained comfortable. But it expects the situation to be tight in the context of the expected pick-up in credit growth in the so-called busy season, advance tax payments and the festival-related currency demand. But there is no evidence to support these premises if one looks at the trends in the economy relating to the underlying variables. It is a moot point whether the CRR cut will lead to a reduction in lending rates without affecting deposit rates. State Bank of India’s net interest margin (NIM) was 3.85 per cent as on March 12, 2012. The domestic and foreign NIMs were 4.17 per cent and 1.70 per cent, respectively. The bank’s Indian customers are subsidising their foreign counterparts. SBI has been at the vanguard of the demand for the reduction, nay, abolition, of the CRR!
Those who argue for growth over price stability should note that inflation has affected savings, especially in financial assets. It is wiser now to borrow to finance the purchase of a house rather than try to save the amount over a period. In an inflationary situation, the borrower gains at the expense of the lender.
A Seshan Mumbai
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