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| RBI hikes CRR to 8.25 pc, leaves key rates unchanged | | | Mumbai | Apr 29
The Reserve Bank today hiked the percentage of cash commercial banks should keep in reserve by 0.25 per cent to suck out excess liquidity, a move aimed at tempering demand for loans and easing inflation from three- year highs.
Although it left key short-term lending and borrowing rates (repo and reverse repo) and Bank Rate unchanged, it hiked Cash Reserve Ratio for the second time in a fortnight to 8.25 per cent.
Today's increase would suck out over Rs 9,000 crore excess funds from the banking system, while the 0.5 per cent increase in CRR announced on April 17 was aimed at squeezing out Rs 18,500 crore from the system.
The move is aimed at fighting inflation, which is ruling at an intolerable 7.33 per cent. The high rate has prompted RBI to revise its inflation comfort band from the earlier 5 per cent to 5.5 per cent.
"Inflationary pressures from international food and energy prices appear to have amplified and by current indications, are likely to remain so for some time," RBI said in its Annual Monetary Policy for 2008-09.
The apex bank said it looks to reduce inflation to 3 per cent in the medium term.
Although measures to tackle inflation are widely expected to trip economic expansion, the RBI projected India's GDP to grow by a healthy 8-8.5 per cent for 2008-09 assuming that global financial and commodity markets and real economy will be broadly aligned with the central scenario and normal monsoon conditions prevail.
While the previous installment of CRR hike would come into full effect on May 10, today's hike would take effect from May 24.
The hike may compel banks to increase interest rates and temper demand for loans, which in turn could help ease inflation by reducing consumption. Some banks have already announced an increase for select loans, like auto.
"There are concerns that demand pressures, which have been reasonably contained so far are being coupled with supply-side factors, which if not temporary, could impact domestic inflation significantly," the RBI said.
Recognising the evolving constellation of adverse international developments, the RBI said it will respond swiftly with "both conventional and unconventional measures" against factors impinging on inflation expectations, financial stability and growth momentum.
"There is now much high probability of a global economic and credit slowdown than was anticipated till recently," the RBI said.
The RBI expects the recent budgetary measures for personal income, reduce and rationalise excise duties to provide a conducive environment to revive consumption demand. "Investment demand is robust and likely to remain the driving force for overall economic activity" it said. |
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