RBI hikes CRR, repo rate by 50 bps

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Mumbai, Jun 24: On Tuesday, June 24, the Reserve Bank of India (RBI) announced the hike of 50 basis points (bps) in repo rate with immediate effect and cash reserve ratio (CRR) in two stages, in order to contain spriralling inflation.

The repo rate under the Liquidity Adjustment Facility (LAF) is increased to 8.50 per cent from 8.00 per cent. CRR is being increased by 50 basis points to 8.75 per cent in two stages, effective from specified fortnights - the first 25 bps hike to 8.50 per cent to be effective from July five and second 25 bps hike to be effective from July 19, RBI stated in a release here late evening. "In view of the criticality of anchoring inflation expectations, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance," RBI said.

The central bank stated that the monetary policy has to urgently address aggregate demand pressures, which appear to be strongly in evidence as the inflation has increased to a 13-year high. Subsequently, inflation expectations have been driven up by unrelenting pressures from international commodity prices, particularly crude and metals.

''Furthermore, consumption demand appears to be reviving the production of consumer goods, with a turnaround in the production of durables,'' RBI said, adding, with merchandise imports running ahead of exports, the trade deficit widened sizeably in 2007-08 and has continued to expand in April this year.

The apex bank felt that there has also been some tightening of external financing conditions in the ongoing global financial turmoil.

''Fiscal pressures are emerging due to the possibility of enhanced subsidies on account of food, fertiliser and POL as well as for financing deferred liabilities relating to farm loan waivers with implications for additional pressures on aggregate demand, and with potential spillovers into the external sector,'' RBI said.

The overall stance of monetary policy in 2008-09 was set in terms of ensuring a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets, while being conducive to continuation of the growth momentum with due emphasis on credit quality and credit delivery, the central bank asserted.

''It was resolved to respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate,'' it added.

Keeping in view the lagged effects of such measures on the economy, RBI has been acting pre-emptively from April onwards, the apex bank said, adding, it had accordingly hiked the CRR by 25 basis points each from the fortnights beginning April 26, May 10 and May 24, 2008.

Further, on May 30, special market operations were announced to alleviate the binding financing constraints faced by public oil companies in importing POL as also to minimise the potential adverse consequences for financial markets in which these oil companies are important participants. Subsequent to the announcement of the oil price hike, the repo rate was increased by 25 basis points on June 11 this year, RBI said.

''This calibrated approach on an ongoing basis and in a timely manner draws upon the lessons from managing these challenges in the recent period,'' it said.

The central bank stressed that the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.

However, several positive factors that currently exist need to be recognised. Relative to several other emerging economies, the Indian economy has, by and large, a reasonable supply-demand balance which provides some insulation in managing this unprecedented shock from global oil markets, RBI said.

Domestic financial markets and institutions have been largely secured against the contagion from the unsettled conditions in international financial markets.

Furthermore, India is somewhat de-coupled from the intensifying global food crisis in view of the improvement in domestic agricultural performance. The external sector is strong and resilient with modest current account deficits relative to the size of the economy and has a comfortable level of foreign exchange reserves.

Accordingly, the major focus of public policy at the current juncture needs to be on dealing with the impact of the escalation of international crude prices in a well-managed and smooth adjustment that draws on demonstrated strengths and positive outcomes.

Moderating and managing aggregate demand, so that pressures on prices are not intensified, is a critical element of this approach, RBI added.

UNI

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