Reddy turns screw, gingerly

Updated on Oct 30, 2007 10:28 PM IST

The RBI, struggling with the side-effects of capital rushing into the country, tightens cash conditions and analysts predict further steps are possible if more funds poured in.

HT Image
HT Image
Hindustan Times | ByBS Srinivasalu Reddy & agencies, Mumbai

The Reserve Bank of India (RBI), struggling with the side-effects of capital rushing into the country, unexpectedly tightened cash conditions on Tuesday and analysts predicted further steps were possible if more funds poured in.

The RBI left its key interest rates unchanged as expected but raised the cash reserve ratio (CRR), the proportion of cash banks have to keep on with it on deposit, by 50 basis points to 7.5 per cent, its highest since 2001.

The CRR increase takes effect from November 10, and will drain Rs 15,000 crore from the banking system. It was last raised in August and when the rise comes into effect it will have gone up 250 basis points since December 2006.

The moves comes less than a week after the stock market regulator tightened rules for unregistered foreign investors putting their money into India's record-breaking stock market, which the finance minister said was aimed at moderating the rush of funds and warding off a stock market bubble.

Reflecting the policy tightening, the partially convertible rupee gained to 39.3650/3700 per dollar from 39.40/41 before the decision, nearing a recent 9-year high of 39.27.

The central bank, concerned about export competitiveness and market stability, has intervened heavily this year to contain the rupee's rise on the back of strong portfolio and direct investment inflows. Foreign investors have ploughed a net $17 billion into Indian shares since the start of January, about $4 billion of that in October alone, with India's attractiveness as the world's fastest-growing major economy after China drawing them in.

The Benchmark index, Sensex, hit its latest record high on Tuesday morning, although it ended the day down 1 per cent. Analysts said the RBI’s move showed it expected more inflows, which it could not counter by intervention alone.

The central bank said while inflation had moderated earlier in the year, headline inflation was emerging from a prolonged trough and oil and food prices were a risk. RBI Governor Yaga Venugopal Reddy told a news conference domestic conditions were as expected in terms of growth, stability and overall conditions. "Therefore the status quo on monetary policy can continue, except one that is liquidity," he said.

But the central bank warned the global environment was "fraught with uncertainties" and incomplete pass-through of price gains in crude, metals and food to domestic prices indicated suppressed inflation.

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