Reducing excessive surplus should be top most priority: Rangarajan
By Ankit Sharma
Dec 22, 2009
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Expressing concern over a huge surplus in the system, the Prime Minister's Economic Advisory Council Chairman, Dr. C Rangarajan said that a hike in Cash Reserve Ratio (CRR) was expected to tackle the liquidity. CRR is the liquid cash that banks have to park with RBI.

He also said that there could be an increase in interest rates later to put a check on inflation.

Dr. Rangarajan said that if the prices do not go down in December, then early action could be taken, adding that reduction of liquidity will be the first priority.

When questioned about the possible action on inflation and huge surplus, he said, "The behaviour of interest rate will depend upon a number of circumstances. But probably there could be some need to reduce liquidity at some particular point after December, if the traditional decline in prices does not happen."

Dr. Rangarajan's statements indicate that RBI could hike CRR and increase the key policy rates also. The current repo rate, the rate at which RBI lends to banks, is 4.75 percent and the current reverse repo rate, the rate at which RBI borrows from banks stands at 3.75 percent.

Bankers also expect a rate hike in 2010 They foresee a substantial recovery from the economic slowdown in 2010 and feel that this could lead to a pick up in credit growth thereby resulting in higher interest rate regime.


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