“Increase in credit/deposit (CD) ratio can turn around the economy and help it come out of the recessionary phase.” Give arguments For and Against this view.
One of the reasons for current recession is said to be the liquidity crunch. Lack of liquidity results in putting various investment proposals and new projects on the hold, reducing the overall investment in the economy considerably. Reduced investment thus becomes the main cause for reduced economic activity and employment generation. To increase the investment in the economy, increase in CD ratio can play an important role. CD ratio is the ratio of the credit extended to the total deposits received in the banking sector.
Arguments For the View
(a) Increase in CD ratio would mean increase in the availability of liquid cash in the economic system. Such increase would have an easing effect on the interest rates and encourage the investors to start investing in the projects put on hold by them. Hence, with the help of higher CD ratio the recession can be tamed.
(b) One of the important factors that determine the economic activity is the state of mind of the investors which is further determined by the market conditions. Attempt of the government to increase the CD ratio itself creates a positive impression and environment for positive psychological impact on the markets.
(c) Higher CD ratio not only results in pumping in more funds in the economy but also improves the profitability of the banking sector as a whole, as it results in more revenue in terms of interest income for them.
(d) Higher CD ratio of the commercial banks also means optimum utilization of the economic resources of the country for economic
Arguments Against the View
(a) Even if liquidity is available in the money market, it is the expectation of profit which would be the motivating factor for future investments. Hence, the higher CD ratio may not play an important role to that extent.
(b) Higher CD ratio may be only one of the many positive factors required to take the economy out of the recessionary phase. But this cannot be said to be the only condition.
(c) Recession is one of the phases of cyclical fluctuations which are faced by all the economies from time to time and takes some time to overcome. The government is required to take several measures to create positive conditions for talking such situation. It would be wrong to say that CD ratio increase alone would take care of the recession.
(d) It is combined set of measures with respect to both monetary and fiscal policies which enable the government to take care of any difficult economic situation. Increasing the CD ratio is just one of the many monetary measures that the government takes.