My View on "CRR - Breaking self imposed silence.........."

If in India the effect of CRR, as argued by Dr. Nagarajan, is neutral or even perverse, it is not clear as to why this instrument is used to block not only the statutory minimum ratio but also much in excess of it. Banks being commmercial entities and expected to make profits (fortunately, the earlier view that public sector banks are not expected to make profit is no longer stated) have a certain cost of funds and if interest is not paid even on the excess balance required to be maintained,how is this justified? Dr. Nagarajan should touch on this point.
- A. Chandramouliswaran

Dear all,

This is an interesting debate. The point raised by Mr.Chandramouliswaran (if the effect of CRR is neutral or perverse, why it is used?) remains unanswered. Dr.Nagarajan has left it to RBI younger generation. Let it be. I do recall that myself and Dr.Nagarajan debated this issue in mid 1980s when both of us were faculty in the BTC. The debate was endless-- and now also I leave at that. Here is a link which in technical sense explains how CRR operates in a lay man's language  http://www.tatamutualfund.com/Knowledge-Center/Cash%20Reserve%20Ratio.pps. 

I have also attached an article (first part only is relevant) on the issue of future of CRR written in 2010 

(http://xa.yimg.com/kq/groups/31273828/1757422588/name/about). Both  Dr.Nagarajan and Mr.Chandramouliswaran are my best friends--no offence to any of them. I am personally somewhat sympathetic to SBI Chairman's view in the current context of the banking system being sqeezed from every corner--high policy rate, CRR with not interest, Basel III, etc.,  but the way in which he put forth his views invited rightly the wrath of the Reserve Bank. He was also erroneous in some part of his statement as pointed out by Dr.Nagarajan (particularly relating to CRR application to non-banks). 

KSabapathy (via email)