RBI hikes CRR in two stages by 50 basis points

Mumbai, Dec 9 (UNI) The Reserve Bank of India (RBI) has announced a 50 basis points increase in the cash reserve ratio (CRR) banks must keep with the monetary authority, to check inflationary pressures.

Accordingly, the CRR, or the percentage of bank's deposits kept in cash with the RBI, will go up to 5.50 percent in two 25 basis point stages, the RBI said in a statement issued late last evening.

The first stage will take effect on December 23, 2006 and the second on January 06, 2007. This is the first time the ratio has been increased in more than two years.

''The move is expected to push up bond yields higher. It is a sort of tightening of monetary policy albeit differently. The more the instruments the better because it spreads the pain around,'' said an economist.

Wholesale price index-based inflation was running at 5.30 percent in the 12 months to November 25, 2006 compared with 4.48 percent in the corresponding week of last year.

The Government effected a cut in the retail prices of fuel last week citing lower prices of crude oil. ''The recent reduction in prices of petrol and diesel will moderate inflation, but the overall impact on inflation expectations requires to be monitored and moderated,'' the RBI said.

''A seasonal decline in prices of food articles could moderate the inflation pressures but the wholesale price index (WPI) inflation, excluding food articles, is close to 5 percent,'' it said.

It said a total of Rs 13,500 crore (dollar equivalent of US$3 billion) in surplus cash will be absorbed from the banking system as a result of the increase.

It may be noted that the apex bank had said earlier that its medium-term aim was to cut the CRR to 3 percent.

Mr Devendra Nevgi, Fund Manager & Head - Fixed Income, Quantum AMC said the move will help cool inflationary expectations.

''It is fair to say they are looking at the overheating issue at a much stronger way,'' he said.

The RBI began its tightening phase in October 2004. Since then the reverse repo rate, with which the central bank absorbs excess cash, has been raised 125 basis points to 6 percent, while the short-term lending rate during the same period has been raised by 150 basis points to 7.25 percent, most recently by 25 basis points on October 31, 2006.

In fact, the country's economy rose 9.1 percent in the first half of the current fiscal year that began April 1, on track to exceed RBI's full-year forecast of 8 percent. RBI maintained that the external sector remained strong.

''However, it is necessary to recognise the challenges emanating from capital flows and consequent impact on increasing liquidity'', it said in the statement.

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