The Reserve Bank’s decision to tighten the monetary policy will have a negative impact on the growth rate, finance minister Pranab Mukherjee said after the central bank raised the repo and reverse repo rates by 25 basis points (100 bps = 1%) each in its latest review on Tuesday.
Mukherjee, however, said the impact on the growth rate would only be for the short term. “In the medium-to-long term, the changes announced by the RBI should actually help the economy to do better,” Mukherjee said.
The RBI decided to leave the statutory liquidity ratio or SLR (the portion of deposits banks need to maintain in cash, gold and government bonds) and the cash reserve ratio or CRR (the amount banks need to park with the central bank) unchanged.
“I respect this decision (to increase the short-term rates) made in a difficult time. This will create some monetary tightening in the country without narrowing the LAF (liquidity adjustment facility) corridor,” Mukherjee said.
According to Mukherjee, there was concern about liquidity shortage last week when the RBI injected a lot of credit through the repo window . “Let me clarify that this is a very short-run phenomenon caused by the huge oversubscription to the Coal India IPO,” he said, adding that the liquidity shortage showed market’s confidence in the industry . “I am glad that the RBI has risen to the challenge and used a very careful combination of policies to complement what the government is doing to steer our economy to grow better and harness inflation.”
Mukherjee said the signals from the economy were mixed and the policy decision has come when industrial growth had shown signs of slowing in August, the last month for which the detailed data is available. “Inflation, while less than what it was some months ago, is still not in a zone where we can sit back,” he said.