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Friday, Apr 18, 2008
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RBI measure to contain inflation

Special Correspondent

Raises Cash Reserve Ratio in two stages

Will suck out
Rs. 18,500 crore
from the system
Banks will wait for credit policy announcement

MUMBAI: In an urgent move to contain surging inflation, the Reserve Bank of India (RBI) on Thursday increased the Cash Reserve Ratio (CRR) of banks by 50 basis points from 7.5 per cent to 8 per cent in two stages — to 7.75 per cent from the fortnight beginning April 26 and to 8 per cent from May 10. As a result of the increase, an amount of about Rs. 18,500 crore would be absorbed from the banking system. CRR is the percentage of deposits that banks must keep with the central bank. This means banks will be in short of that much of deposits for lending purposes, which is a monetary measure to tighten money supply. The CRR hike came in just prior to the RBI’s forthcoming annual policy announcement on April 29. “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,” the RBI said while increasing the CRR.

On a review of current liquidity situation, the RBI stated that “it is considered desirable to increase the CRR of scheduled commercial banks, regional rural banks (RRBs), scheduled State co-operative banks and scheduled primary (urban) co-operative banks by 50 basis points to 8 per cent in two stages.” In the third quarter review of the Annual Statement of Monetary Policy for 2007-08, January-end 2008, the RBI had stated that over the period ahead, liquidity management will continue to assume priority in the conduct of monetary policy. It was further stated that the liquidity conditions were being shaped by several underlying factors and their developments had implications for liquidity management going forward and warrant appropriate and timely action.

The liquidity adjustment facility (LAF) had been in an injection mode persistently during the second half of March 2008. Subsequently, there was a large turnaround and, an average amount of Rs. 40,088 crore was absorbed through the LAF during April 3-17, 2008 as against the average daily injection of liquidity of Rs. 27,385 crore during March 17-31, 2008.

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