labels: economy - general, banks & institutions
RBI raises cash reserve ratio to 6.0 per centnews
13 February 2007

Concerned by accelerating inflation, the Reserve Bank of India today announced its decision to raise the cash reserve ratio (CRR), the second in two months, by 50 basis points, to 6 per cent in two stages, the first on 17 February and the second on 3 March.

CRR is the cash banks have to keep with the RBI on deposit.

A statement from the bank said, "In view of the paramount need to contain inflation expectations and in the light of liquidity conditions, it has been decided to increase the CRR ... by one half of one percentage point ... in two stages."

RBI expects to curb bank funds to the extent of Rs14,000 crore from flowing in to the market.

On 31 January, announcing the quarterly review of the monetary policy, RBI had raised its main lending rate taking it to 7.5 per cent to control inflation and keep the credit growth from rising above around 30 per cent.

The RBI noted that since 31 January the government's annual GDP growth estimate had risen to 9.2 per cent for the current financial year ending 31 March, a sharp increase in industrial output over a year ago, and an increase in the annual rate of inflation to 6.6 per cent, the highest in two years.

It is evident that RBI is concerned by inflation creeping upwards and is determined to use all the monetary measures at its command to cool price pressures, as the RBI deputy governor Rakesh Mohan indicated at a seminar in New Delhi.

According to Mohan, when an economy underwent structural changes there could be micro imbalances that lead to excess demand and overheating. "What bothers us is firming up of inflation in recent months, which is currently higher than our projected estimates ... inflation represents a key concern for us."

He said both demand-driven and supply-side price pressures were adding to inflationary pressures. He said, "In conjunction with strains that we observe in capacity utilisation, elevated asset prices and surge in demand for bank credit and the rising price of manufactured products constitute good evidence of excess demand pressure evident in India," Mohan said.

The challenge, Mohan said, was to manage the transition to a higher growth path without inflation and inflation expectations becoming mutually reinforcing. He however added that sustaining 8 to 9 per cent growth in the medium-term appeared "eminently realisable".

Mohan also added that food prices had risen due to declining stocks of food grains and high global prices, which were reflected in the headline inflation numbers.


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RBI raises cash reserve ratio to 6.0 per cent