Explaining his choice of adjusting the CRR rather than interest rates, Subbarao said, “If we had used interest rates it would mean that the amount of liquidity we would have absorbed would have been more unpredictable.” True Mr. Governor, but then, was there really a need to touch any of them? By increasing CRR hasn’t RBI made both inflation and growth more unpredictable now? In fact, RBI has itself raised both its growth and inflation forecasts for the current fiscal. While, it has raised its end-March WPI inflation target to 8.5 per cent from 6.5 per cent earlier, GDP growth forecasts for FY2010 has been raised significantly to 7.5 per cent from 6 per cent earlier. However, a simple calculation and this targeted growth rate perhaps seem to be a distant dream!
As per Central Statistical Organisation (CSO), the GDP grew by 7 per cent in H1 FY2010. So if overall expansion for FY2010 is targeted at 7.5 per cent (not to forget RBI expects Q3 growth rate to be lower than Q2’s 7.9 per cent), it means the economy will have to grow over 8-8.5 per cent in Q4 FY2010, which at present seems be an unlikely phenomenon. Raison d'être: RBI’s growth assumption is based on flat growth of agriculture sector (which anyway has been stagnant for quarters now). But given an expected 16% fall in kharif crop output this year, as many experts believe, agriculture’s contribution to GDP is estimated to fall by over 5%. Moreover, the growth momentum in industrial and services sector doesn’t really seem to compensate the fall in agriculture. So, God knows how the economy is going to click that growth number (7.5%). Even by if any chance the central bank’s projections on growth and inflation materialise, odds are that the latest CRR hike could prove insufficient to tackle the situation.
As per Central Statistical Organisation (CSO), the GDP grew by 7 per cent in H1 FY2010. So if overall expansion for FY2010 is targeted at 7.5 per cent (not to forget RBI expects Q3 growth rate to be lower than Q2’s 7.9 per cent), it means the economy will have to grow over 8-8.5 per cent in Q4 FY2010, which at present seems be an unlikely phenomenon. Raison d'être: RBI’s growth assumption is based on flat growth of agriculture sector (which anyway has been stagnant for quarters now). But given an expected 16% fall in kharif crop output this year, as many experts believe, agriculture’s contribution to GDP is estimated to fall by over 5%. Moreover, the growth momentum in industrial and services sector doesn’t really seem to compensate the fall in agriculture. So, God knows how the economy is going to click that growth number (7.5%). Even by if any chance the central bank’s projections on growth and inflation materialise, odds are that the latest CRR hike could prove insufficient to tackle the situation.
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