‘Central bank measures will not affect credit flow’


New Delhi : Finance Minister P. Chidambaram Wednesday said the hike in the cash reserve ratio (CRR) announced by the central bank a day earlier will not affect the flow of credit from commercial banks.

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"The Reserve Bank of India is concerned with excess liquidity," Chidambaram told reporters here after a meeting with the chief executives of commercial banks, a day after the central bank reviewed the monetary and credit policy for 2007-08.

"There is certain excess liquidity in the system. That is why it has increased the CRR," the finance minister said, and added that banks can not only take a small hit on their balance sheets but also maintain credit flow.

"The cost of the CRR hike will have to be borne by the banking sector either by lowering the deposit rates or by adjusting the lending rates."

The Reserve Bank of India (RBI) had revised upward by 50 basis points the CRR – or the minimum funds banks have to retain against deposits – in order to check the growth of money supply in the country and keep inflation under check.

Chidambaram also addressed the concerns on high interest rates expressed by Indian companies and said the main priority of the central bank and his government was to tame inflationary expectations.

"If inflation can be contained at between 4 and 4.5 percent, we can ask banks to nudge the interest rates down."

The finance minister also said there was no proposal to pay interest to banks on the CRR retained by them, as there has already been an amendment to this effect in the Reserve Bank of India Act.

"The RBI has taken a decision there will be no interest paid on CRR balances. So there is no plan to revisit this decision," he said, referring to the amendment last year of doing away with the 3.5 percent interest paid on CRR.