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A high credit-deposit ratio also indicates that a bank is not paying adequate attention to asset liability management. If many banks are indulging in this, cumulatively it poses a threat to overall systemic stability.

One good point about this policy review is the clarity of central bank to move ahead in a single-point agenda of controlling inflation, unlike in the past when inflation control was balanced with economic growth.

Besides the pressures from global commodity markets, the economy may also have to bear the burden of higher subsidies, loan waivers, and increased salaries of government employees once the Sixth Pay Commission recommendations are implemented. With the downward movement in the GDP growth, Government's commitment for higher subsidies, loan waivers, and increased salaries of government employees under Sixth Pay Commission is questionable.

When, on one hand, RBI is going ahead in the direction of Financial Inclusion and emphasizing on credit quality and credit delivery for employment-intensive sectors, and on the other hand, borrowing cost is increasing with an increase in CRR and Repo Rate. I doubt how two issues contrary to each other can be resolved.

Conclusion

When the capital market is not encouraged, bond values are sliding, banks income statement is having a negative impact, growth numbers are coming down, and inflation is not targeted in the short run, then I don’t consider playing with CRR and Repo Rate will result into what is targeted out of them. I think this is not the correct thing to do now, as it will have its negative affect on growth momentum, which is the only hope in the current economic scenario.

Concluded.

Dr. Gourav Vallabh is at present Professor (Finance) at XLRI Jamshedpur.
He is a Certified Financial Risk Manager (GARP, USA), Chartered Accountant (ICAI, India), Company Secretary (ICSI, India), Ph.D. (UoR, India), M.Com., LL.B.
Currently, he is also associated with Govt. of Rajasthan in the capacity of Honorary Advisor to Ministry of Revenue.
Article posted on August 9, 2008.