27 January, 2021

The Scent Of A Crash

The RBI is scripting a tale of economic imbalance with a disastrous end

Illustration by Sorit
The Scent Of A Crash
If one ever needed proof that stubbornness does not pay, Dr Y.V. Reddy, the governor of the Reserve Bank, has just provided it. On Tuesday he announced another increase in the Cash Reserve Ratio (CRR)—the amount of depositors' money that commercial banks have to deposit with the Reserve Bank, to 7.5 per cent. This is the fourth time this year. His justification for the increase is that money supply is growing dangerously fast and an enormous 'liquidity overhang'—money that is accumulating in the banking system with no takers—has developed. It is imperative to impound this money lest it start generating inflation. Increasing the CRR by half a per cent and thereby taking another Rs 20,000 crore out of the credit base of the banks is a quick and convenient way of doing this.

At first glance, the data seems to vindicate Reddy's move. Money supply has increased by 21.8 per cent in the past year against 18.9 per cent in the same period of '05-6. Deposits with the commercial banks have grown by 24.9 per cent against 20.4 per cent. And the...


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