Overview of the mid-term review of the monetary and credit policy 2004-2005

27 October 2004

The mid-term policy review is aimed at keeping up growth and managing inflation. By Uday Chatterjee.

The mid-term review of the monetary policy has been set against the backdrop of inflation casting a heavy shadow over economic growth. It is evident from the salient features of the mid course review of the policy formulated earlier, the spectre of inflation has been weighing heavily on the government.

In May when the policy for the year 2004-05 was announced, inflation was estimated at a manageable five per cent. However, over the past few months, the sustained pressure of an unprecedented rise in the global prices of crude oil have sent all previous calculations awry. As a result by September this year, inflation had shot up to 7.89 per cent.

Fire fighting measures like import duty cuts on oil and permitting oil companies to raise the prices of diesel and petrol, though within a band, were announced. This helped, to some extent, and inflation is now 7.1 per cent, though even this is not satisfactory and more needs to be done.

Apart from duty cuts, increasing the cash reserve ratio (CRR) and the interest rate on deposits can contain inflation. The CRR is the amount of cash which banks hold with the Reserve Bank of India (RBI). If the CRR is increased, the money floating in the system comes down thereby easing inflationary pressures. The RBI hiked the cash reserve ratio by 50 basis points in two stages effective from mid-September 2004.