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Today RBI went for a CRR cut which was expected but went expecting suddenly for the market. Well Currently RBI has reduced the CRR from 6% to 5.5% which will lead to inflow of Rs.32000cr in to the banks pockets. Now market speculators will turn out the meaning that RBI has injected money for lending into the system. But I am sorry to make an analysis that RBI has injected the money in order to make Banks adjust their Balance sheet against rising NPA. Further this will help them to manage the tier I capital norms of the banks after the implementation of Basel III.


In my research find RBI steps of actions towards monetary balance is very much in line with India’s economic growth. I don’t find any reason why RBI should reduce the repo rates and the reverse repo rates. It is very much premature to roll back the repo rates as inflation is still way above the danger zone. Even I find that this CRR might go for spooking up the inflation devil acting as a steroid. Since the thumb rule` of CRR is that when inflation rises CRR is the common weapon used to control inflation. Reduction of CRR will give Rs 32000 cr to banks to lend but they will not lend and further even if it’s being given for lending Indian corporate still finds its high cost of loans. RBI has made one thing very clear that its policies will depend and will be designed depending upon the policy actions required for the Governments.

The present scenario of the economy does not support for repo rate cuts. Since NPA are increasing and that is backed by lack of policy actions from the governments .Government has borrowed too much and this has spooked the system with funds and resulting increase in inflation. Currently the Government of India will borrow Rs 400 billion more than its revised borrowing target of Rs 4.7 trillion in the bond market by March for the current financial year 2011-12.Hence RBI actions regarding repo rates are next to negligible. India needs policies to draw investments and then only repo rates real action can be found. If currently RBI goes for an repo rate reduction then the liquidity will find ways into the existing business environment and not into new projects. Further RBI has reduced the outlook for india’s GDP growth from 7.6% to 7% which eliminates the scope of repo rate cuts in the near future.


If today the government of India comes up with New land Acquisition Bill, DTC, GST, New Companies bill 2011 then repo rates reduction will not be required to find India’s economic growth. Moreover all these new bills will open up investment opportunities, consumption and savings of the economy resulting a boost to RBI policy actions. This will also help RBI to design new money market instruments.


Gross Fixed Capital Formation is one of the most important part where the growth of an economy van be calculated. Historically it’s being found that the Gross capital formation (% of GDP) in India was last reported at 34.77 in 2010, according to a World Bank report released in 2011. The Gross capital formation (% of GDP) in India was 36.48 in 2009, according to a World Bank report, published in 2010. The Gross capital formation (% of GDP) in India was reported at 34.52 in 2008, according to the World Bank .Now this new term might sound quite tough. Hence to put it into simple words Gross Capital Formation means   (formerly gross domestic investment) consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. Inventories are stocks of goods.The chart shows the gross capital formation.


Moreover the recent global turmoil and rupee depreciation needs to tackle only by RBI hence it needs space for managing those aspects of the economy. Moreover RBI needs more time to watch out the flow of liquidity from FDI and FII. In the last 6 months both the investments avenues has dried up due to global uncertainties as a result injection of liquidity into system by RBI has an long way to go. Present market pressure is nothing compared the envisaged possible impacts the economy might face.RBI has to play a long innings and hence T20 expectation should not be made.RBI is not the real market player. If India needs an GDP growth of 8% policy comes first. India needs theory and not mathematics (Repo rates) for GDP growth of 8%.


In an my recent interaction with one of the company who is into economic research I find that the Senior economist working over there are only working hard on rate policy reasoning and denies policy discussion is an part or  role of the economist work. Well with the blessing of this senior economist I find India is took 20 years to dream GDP growth of 8%.I will not name the company but I pity on their thinking.

Category Others, Other Articles by - Indraneel Sen Gupta