labels: rbi, economy - general
RBI raises CRR to 7 per centnews
31 July 2007

In its first quarter review of the annual monetary policy for 2007-08, the RBI hiked the cash reserve ratio (CRR) by 50 bps to 7 per cent from 6.5 per cent. It has kept the repo, reverse repo and bank rates unchanged, leaving the stance of the monetary policy unchanged.

The RBI said the CRR would rise to 7.0 per cent from with effect from 4 August, taking it to its highest level since November 2001. It had last raised the CRR in April, this year.

To drain cash from the system, RBI also withdrew its cap of Rs3,000 crore on its daily money market operations, which it holds twice a day, a move that enables banks to park more funds with it. The central bank said that it was ending the second operation, held in the afternoon, with effect from Monday 6 August.

The FY08 GDP forecast has been retained at 8.5 per cent and the credit policy has retained its medium term inflation target at between 4 per cent and 4.5 per cent. Keeping inflation within 5 per cent in FY08 assumes priority according to the policy.

Reacting adversely to the hiking of the CRR, the markets, which had opened a very strong note with nearly 150 points gap up on Sensex on the back of strong global and strong Q1 FY08 results, slipped before showing partial recovery.


Bank Rate
The Bank Rate has been kept unchanged at 6.0 per cent.

Repo Rate/Reverse Repo Rate
The repo rate under the LAF is kept unchanged at 7.75 per cent.

The reverse repo rate under the LAF is kept unchanged at 6.0 per cent.

In view of the current macroeconomic and overall monetary and liquidity conditions, it has been decided to withdraw the ceiling of Rs. 3,000 crore on daily reverse repo under the LAF with effect from Monday, August 6, 2007. The Reserve Bank, however, retains the discretion to re-impose a ceiling as appropriate.

The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant.

The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed fit, so as to make efficient use of the LAF in daily liquidity management.

The second LAF, which was introduced from November 28, 2005 and is conducted between 3.00 p.m. and 3.45 p.m. on a daily basis, is withdrawn with effect from Monday, August 6, 2007.

Cash Reserve Ratio
The cash reserve ratio (CRR) of scheduled banks is currently at 6.5 per cent. On a review of the current liquidity situation, it is considered desirable to increase the CRR by 50 basis points to 7.0 per cent with effect from the fortnight beginning August 4, 2007.

Mid-Term Review
The Mid-Term Review of the Annual Policy Statement for the year 2007-08 will be undertaken on October 30, 2007.

Also see

also see : Full text of First quarterly review of annual monetary policy for 2007-008
Macroeconomic and Monetary Developments: First Quarter 2007-08

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RBI raises CRR to 7 per cent