'Trying to address inflation with rate hike will not work'

Last Updated: Tue, Oct 30, 2012 20:01 hrs

Pratip Chaudhuri, chairman of the State Bank of India (SBI), the country’s largest bank, on Tuesday questioned the Reserve Bank of India (RBI)’s stance of increasing interest rates to contain inflation.

Talking to reporters, after RBI announced its second quarter review of monetary policy, Chaudhuri said: “I don’t think that so many rate hikes have helped much in slowing inflation because on Tuesday’s inflation is largely cost-push and not demand driven. So, trying to address that (cost-push inflation) with rate of interest as a tool may not be very helpful.”

RBI had increased key policy rates 13 times since March 2010 before pausing in October 2011. The central bank frontloaded a rate cut of 50 basis points (bps) in the repo rate to eight per cent in the annual policy in April, in anticipation of the government taking some steps to contain inflation, and also the twin deficits of fiscal deficit and current account deficit.

But RBI has taken a pause in cutting key rates since then, despite repeated pressures and demands from the government as well as the industry but has been infusing liquidity into the banking system through a cut in the cash reserve ratio (CRR) — the cash that banks need to keep with RBI.

After on Tuesday’s 25-bp cut, CRR stands at 4.25 per cent of net time and demand liabilities for banks.

When asked whether he was hopeful of the cut in interest rates in on Tuesday’s policy, Chaudhuri said in a lighter vein: “Of course, I am optimistic. I had expected a 50-bp cut.”

The SBI chairman reiterated his stand on abolishing CRR, on which he was long engaged in a war of words with RBI Deputy Governor K C Chakrabarty.

“I still hold that CRR is a waste for the economy. But there is a cut by 25 bps, as the governor has his own reasons and compulsions to see inflation down,” said Chaudhuri.

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