Fiscal measures will check inflation, says finance ministry

July 29th, 2008 - 3:26 pm ICT by IANS  

New Delhi, July 29 (IANS) The finance ministry said the upward revision of the cash reserve ratio (CRR) and repo rate by the central Reserve Bank of India (RBI) Tuesday would help in “moderating and containing inflation”. “The government expects that the measures taken by RBI Tuesday, in continuation of the measures already taken over the last two months, will help in moderating and containing inflation,” said a finance ministry statement.

RBI Tuesday increased the repo rate or the rate at which RBI lends to banks by 50 basis points to nine percent and the CRR or the portion of deposits banks have to keep with the RBI by 25 basis points to nine percent.

RBI’s fiscal measures have come when India’s headline inflation started moderating steadily, estimated at 11.89 percent for the week ended July 12 as compared to 11.91 percent the week before.

“The increase in CRR and repo rate is a signal to the banks that credit growth must be moderated, having regard to the need to moderate aggregate demand,” the ministry said.

“If requests for loans are carefully appraised and credit is allocated prudently, it is possible for the banks to ensure that adequate credit is available to the productive sectors,” it added.

The finance ministry said the RBI in its first quarter review Monday had noted “potential inflationary pressure from international food and energy prices are likely to remain so for some time”.

“Consistent with the above conclusion, RBI has Tuesday increased the repo rate by 50 basis points and, with effect from August 30, the CRR by 25 basis points,” the statement said.

The CRR impounds funds available with the banks. The repo rate is the rate at which the banks are allowed to access funds from the RBI for liquidity adjustment.

Earlier, the RBI had increased June 24 the repo rate by 50 basis points to 8.5 percent from eight percent, while the CRR by 50 basis points to 8.75 percent from 8.25 percent.

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