The spiraling rise in CPI based inflation on one hand and the declining industrial growth as seen in IIP numbers on the other hand have been the focal point of governance, both for the government as well as the Reserve Bank of India during the past decade. The liberal fiscal policies of the government has fuelled inflation and the RBI has deployed all the monetary tools at its disposal, notably the Cash Reserve Ratio (CRR) to rein in inflation. While tweaking the CRR has helped bring down inflation in the short term it is not without criticism that consistent increase in CRR has hurt industrial growth by sucking out liquidity and contracting demand. This research paper is a statistical and econometric study to validate the prudence of consistently increasing the CRR in an attempt to curb inflation. The results of the study have shown that hike in CRR brings down inflation as an immediate relief with no significant effect on industrial growth in the short term but may be detrimental to the economy in the long run. The study is expected to aid policy makers in determining whether to contract the demand by consistently increasing the CRR or should the focus shift towards improving the supply side in order to tame inflation.
CRR, Fiscal policy, Monetary policies, Inflation, CRR, Industrial growth, Monetary tools
