RBI ups CRR by 0.5 pc points | india | Hindustan Times
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RBI ups CRR by 0.5 pc points

The RBI increased the Cash Reserve Ratio – the share of deposits that commercial banks must hold in cash with the central bank – from 7.5% to 8%, reports MC Vaijayanthi.

india Updated: Apr 18, 2008 02:38 IST
MC Vaijayanthi

The Reserve Bank of India on Thursday increased the Cash Reserve Ratio – the share of deposits that commercial banks must hold in cash with the central bank – from 7.5 per cent to 8 per cent, in a bid to curb inflation by leaving less money with spenders.

The 50-basis-point hike, which will come in two equal tranches effective April 26 and May 10 respectively, will result in sucking out Rs 18,500 crore from the banking system. It may increase cost funds for commercial banks, forcing them to increase interest rates they charge on loans to consumers.

"In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis," an RBI statement said.

In its last quarterly review, brought out on January 8, RBI had said liquidity management will continue to assume priority, even though the wholesale price-based inflation rate stood at 3.83 per cent at the time. It has since increased to 7.41 per cent as on March 29, before easing a bit to 7.14 percent in the following week.

The CRR hike comes two days after RBI Governor Y.V. Reddy said the inflation rate was “unacceptably high.”

Bankers said they would wait to see how it impacts liquidity and cost of funds. "One has to watch and see if interest costs in the system are going up," said Chanda Kochar, Deputy Managing Director at ICICI Bank. "Normally, in this season interest costs come down and there are other factors, which increase liquidity."