ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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From 50 Years Ago: Reserve Bank Relents.

Editorial from Volume XIII, No. 3, January 21, 1961.

The Reserve Bank has come round to the view that its experiment with credit restraint by rais-ing the statutory reserve ratios of the scheduled banks was, in fact, unwarranted and it has now called it off. The experiment began in March last year when scheduled banks were directed to impound 25 per cent of the increase in their deposits as additional reserves with the Re-serve Bank. This percentage was raised in May to 50 but brought down to 25 in the month of November, when the busy season began. Now that the demand for funds has gone up and stringency has become acute, further relaxa-tion was obviously warranted. What’s in a name? What the Reserve Bank has been pursu-ing, it chooses to call “a monetary policy of flex-ibility”. In retrospect, perhaps, it has realised that the diagnosis on which the prescription of restraint was based was obviously wrong. In any case, actual experience has proved it wrong and the Reserve Bank has to be congratulated for profiting from experience and retracing its steps. How wrong the Bank could be was brought out in a striking manner during the last slack season when bank credit declined by a mere Rs 20 crores while the Governor of the Bank had issued a directive to bring it down by Rs 100 crores. That the rising trend of industrial pro-duction had continued, for one thing, had obvi-ously taken the Reserve Bank by surprise. How could industrial production possibly expand when import control remained so rigid and even maintenance imports were drastically cut?

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