....The central bank can also influence interest rates, by raising or reducing the ‘repo’ and ‘reverse repo’ rates at which banks borrow from or park money with it. Given these far superior monetary policy options — that are, more importantly, culturally in sync with the current regulatory philosophy — the CRR is an anachronism that ought to be dispensed with, or used in “extraordinary circumstances”, as Rangarajan puts it. The CRR made sense in 2007-08, for instance, when the country was inundated by over $100 billion of capital flows, which posed unprecedented challenges to domestic liquidity management. That is hardly the case now, when forex inflows have moderated considerably and firms are battling liquidity constraints. Now that Rangarajan, a former RBI Governor himself, has favoured doing away with the CRR, it is time to make a start. By neither reducing the CRR nor the repo rate, the RBI has made it difficult for banks to bring down their cost of funds, without which they cannot lower their lending rates either. The only way out, then, is to reduce deposit rates, which is what the State Bank of India (SBI) has done and others, too, may follow..
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