.........It is not that RBI cannot, and should not, pay interest on CRR as demanded in some quarters. Only that to have the desired extent of impounding to influence aggregate demand in the real economy, M3 will still need to be contracted by a certain amount. What will happen if interest is paid is that the effective/ substantive contraction/withdrawal of money will be less to the extent of interest - reserve/ primary/base money - paid by RBI and so CRR will have to be so much higher than, say 4% at present, to achieve the required contraction in M3 (Money Supply) to achieve the required compression in aggregate demand in the real economy !.........
1 comment:
Dear Sir, Well analysed. The logic is simple,either pay interest at 6.75% by hiking CRR to 4.30% or pay no interest and keep CRR at 4%, only the psychological satisfaction of having received the interest as advocated by former SBI Chief Shri Pratip Chaudhury is fulfilled, RBI monetary policy objectives remaining the same.
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