RBI hikes CRR by 25 basis points, other rates steady | business | Hindustan Times
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RBI hikes CRR by 25 basis points, other rates steady

business Updated: Apr 29, 2008 19:27 IST

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Fighting inflation, the Reserve Bank on Tuesday sought to suck out over Rs 9,000 crore from the banking system by increasing statutory deposits that banks need to keep with it, a move that could put upward pressure on interest rates.

The RBI raised Cash Reserve Ratio by 0.25 per cent to 8.25 per cent in its Annual Monetary Policy within a fortnight of announcing a hike in CRR to suck out Rs 18,500 crore liquidity from the system.

It, however, left all key short-term lending and borrowing rates (repo & reverse repo) and Bank Rate unchanged.

While the previous instalment 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.

On inflation front, globally high commodity and fuel oil prices have forced the Reserve Bank to revise its comfort band from last year's near 5 per cent to 5.5 per cent this fiscal.

"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.

"Inflationary pressures from international food and energy prices appear to have amplified and by current indications, are likely to remain so for some time," it added.

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.

The apex bank highlighted the preference for bringing inflation as close to five per cent as soon as possible, recognising the evolving complexities in globally transmitted inflation.

It maintained its resolve to condition policy and perceptions for inflation in the range of 4-4.5 per cent and an inflation rate of around 3 per cent becomes a medium term objective.

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.