The Hindu : Front Page : CRR to go up by 50 basis points

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Wednesday, Aug 01, 2007
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CRR to go up by 50 basis points

Special Correspondent

RBI reviews quarterly monetary policy

MUMBAI: In a move to curb excess money supply and maintain price stability, the Reserve Bank of India on Tuesday increased the Cash Reserve Ratio (CRR) by 50 basis points to 7 per cent from the fortnight beginning August 4. This measure would suck-out Rs. 16,000 crore from the system. However, the central bank has not indicated any change in the interest rates.

The CRR is the percentage of total deposits, which must be kept with the central bank by commercial banks. The RBI kept the Bank Rate (the long term indicative rate) unchanged at 6 per cent and the short-term indicative rates, Repo rate (the rate at which banks borrow from the RBI) kept unchanged at 7.75 per cent and the reverse repo rate (the rate at which banks park their finds with RBI) kept unchanged at 6 per cent.

Price stability

“Price stability is a necessary condition for growth,” said Y. V. Reddy, Governor, RBI, here on Monday, while reviewing the first quarter of the Annual Monetary Policy for 2007-08. “Recent developments in financial markets in India and potential uncertainties in global markets warrant a higher priority for managing appropriate liquidity conditions in the policy hierarchy at the current juncture,” he added.

On the domestic front, Dr. Reddy said, “We are dealing with aggregate demand in the economy, which needs to be moderated,” adding, “Global financial markets are at a heightened level of uncertainty and we have to keep a vigil.” According to him, visitations of volatility in equity and currency markets with worldwide ramifications have imparted an additional dimension of uncertainty.

Holding inflation within 5 per cent in 2007-08 assumes priority in the policy hierarchy, Dr. Reddy said, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4 to 4.5 per cent on a sustained basis. The central bank also retained the Gross Domestic Product (GDP) for 2007-08 at around 8.5 per cent, “barring any domestic or external shocks.”

In yet another measure to absorb excess liquidity, the RBI also decided to withdraw the ceiling of Rs 3,000 crore on daily reverse repo under the Liquidity Adjustment Facility (LAF) with effect from August 6. However, the RBI retained its discretion to re-impose a ceiling as appropriate.

The policy has also maintained the projected rate of money supply at around 17 to 17.5 per cent for 2007-08 and the growth in aggregate deposits was placed at around Rs 4,90,000 crore while non-food credit was projected to decelerate to 24 to 25 per cent in 2007-08 from 29.8 per cent over 2006-07. “While non-food credit growth has decelerated, the acceleration in money supply and reverse money warrants an appropriate response.”

“Going forward,” Dr. Reddy said, “monetary management would need to be watchful of moments in commodity prices, particularly oil prices, the elevated levels of asset prices and the re-emergence of pricing power among producers as potential threats to inflation expectations.” According to him, “Financial stability may assume greater importance in the months to come.”

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