The Reserve Bank of India has announced it quarterly Monetary Policy yesterday and some of the decisions were on predictable lines. As the Central Bank of the country had to face the twin problems of deficits both on fiscal and current accounts and on the top of it the pressures on the inflation front hardly shows any signs of easing up forcing it to enhance the projected figure from 6.5% to 8.5% .The supply sides factors were worsened in the form of poor south-west monsoon and higher global crude prices leading to galloping food prices. In this scenario, it had very limited options other than to raise Cash Reserve Ratio by 75 basis points aiming at mopping up rupees 36,000 crore from the banking system. It would mean less credit for non-food segments.


The monetary policy which the Central Bank pursued over last few quarters has to be seen in the context of the looming and blooming recessionary conditions in the country and compelling it to follow a credit expansionary policy to tide over a difficult situation. And this first time after a long spell that it is seeking to control credit to counter inflationary pressures.


While the CRR has been increased, there are no changes in the repo and reverse rates. The repo rate is the one at which the central Bank provides funds to other banks against government securities and reverse is the case of reverse repo rate. Through reverse repo rate it mops up excess liquidity.


As an immediate fallout of this announcement, the cheap loans may be a thing of the past. The State Bank of India which launched its home loan scheme with a ceiling of 8% in the first year and linking it to bank's benchmark rate in subsequent years would have to close it.


In the final analysis, the latest stance of the Central Bank of India only goes to reflect its preoccupation with controlling inflation in the economy but what should not be lost sight of is the fact that the country is struggling in the midst of a recession and any credit squeeze at this juncture is likely to affect the pace and the process of economic recovery.

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