New Delhi: Finance Minister P Chidambaram on Monday said the stock market plunge was not a cause for worry and banking shares, which led the overall decline, would re-adjust on their good profitability.
Pointing out that banking stocks fell because of the hike in Cash Reserve Ratio by the Reserve Bank, he told reporters that the central bank's move was aimed at moderating credit.
"Inflation is unacceptably high. It should be below five per cent and towards four per cent," he said, adding more measures would be taken to curb inflation.
Inflation stood at 5.30 per cent during the week ended November 25 against 5.45 per cent during the previous week.
The Sensex tumbled by 537.76 points to 13,261.73 at 1300 hrs as almost all index-related stocks, particularly banking shares, moved in negative zone. Bankex fell by 6.5 per cent.
"There is no need to worry. Stock markets are at their highs. Bank stocks are falling because of CRR hike," he said.
The RBI had last week increased CRR, the amount of assets that all banks must park with the central bank, by 50 basis points to absorb Rs 13,500 crore from the system.
Supply side management and interest rate increases have not been able to moderate credit growth, Chidambaram said.
Credit growth has been over 30 per cent for the last three consecutive years and still stands at 30-31 per cent.
"The move (CRR hike) should moderate credit growth," he said, adding more steps would be taken to curb inflation.
Chidambaram said the decision to hike CRR is nothing surprising given the fact that the Reserve Bank had hinted at it in its October Monetary Policy.
RBI had said in its October Policy that containing inflationary expectations would warrant appropriate and immediate measures.
Widely tracked wholesale prices inflation stood at 5.30 per cent in November 25 against 4.5 per cent a year ago.
However, it is higher consumer prices-based inflation that affects the common man more.
Consumer prices-based inflation for industrial workers, urban non-manual employees, agricultural labourers and rural labourers stood at 7.3 per cent, 7.2 per cent, 8.4 per cent and 8.1 per cent, respectively for the month ended October, 2006 against 4.2 per cent, 4.6 per cent, 3.2 per cent and 3.2 per cent a year ago.
Since CRR is the minimum cash that banks have to keep with the Reserve Bank in proportion to their deposits, a hike in this ratio would suck out liquidity, moderating credit growth and hence inflation.
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