India's central bank hikes cash reserve ratio

Wednesday, 30 April 2008, 14:38 Hrs
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Mumbai: India's central bank hiked the cash reserve ratio (CRR) for banks by another 25 basis points Tuesday in a bid to contract money supply and contain price rise, but kept all other key rates unchanged.

Announcing the annual monetary and credit policy for the current fiscal, the Reserve Bank of India (RBI) Governor Y.V. Reddy said the CRR was being further hiked to 8.25 percent, after a 50 basis points hike announced earlier.

The unexpected latest hike in CRR - the minimum reserves banks have to keep as cash or liquid funds - takes effect May 24. It is expected to suck an estimated 80 billion ($2 billion) out of the financial system.

The move is to bring down spiralling prices in India that has pushed the annual rate of inflation to 40-month highs of 7.33 percent for the week ended April 12 - which is higher than the central bank's tolerance level of below five percent.

The central bank expects the annual inflation rate to slow down to 5.5 percent by the end of this fiscal - still higher than its tolerance level.

Reddy, however, kept unchanged the repurchase rate, or repo rate - which is the discount at which the central bank buys back government securities from banks in a bid to contract money supply in the system.

The repo rate and the reverse repo rate are presently pegged respectively at 7.75 percent and six percent, while the cash reserve ratio, on account of the previous hike, was to go up to up to eight percent as on May 10.

The central bank said it also expected India's growth story to remain intact and predicted the country's gross domestic product (GDP) to grow by 8-8.5 percent during the current fiscal.

Following are the highlights of the monetary policy:

- High priority to price stability while sustaining the growth momentum

- Swift response to adverse international and domestic developments

- Emphasis on credit quality and credit delivery

- Bank rate, reverse repo rate and repo rate kept unchanged

- Banks to maintain cash reserve ratio of 8.25 percent from May 24

- India's growth projection for 2008-09 at 8-8.5 percent.

- Inflation to be brought down to around 5.5 percent

- Going forward, inflation to be tamed at 4-4.5 percent

- Money supply expansion to be moderated to 16.5-17 percent

- Bank deposits projected to increase by 17 percent

- Adjusted non-food credit projected to increase by 20 percent

- Currency futures to be introduced in eligible exchanges

- Indian companies to be allowed to invest overseas in energy sector

- Housing loan limit to individuals with lower risk hiked to 3 million

The monetary credit policy came against the backdrop of Prime Minister Manmohan Singh blaming the diversion of food grain for producing fuel and high crude oil prices for rising inflation, while hoping for a normal monsoon to salvage the situation.

"The world economy has not done enough to address the challenge of price rise," the prime minister told the national conference and annual session of the Confederation of Indian Industry (CII) here Tuesday.

"The diversion of land from food crops to biofuels, and the increasing use of available food grain and vegetable oil for the production of biofuels, have contributed to the rise in food prices," he said.
Source: IANS
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