Date:14/02/2007 URL: http://www.thehindubusinessline.com/2007/02/14/stories/2007021404840100.htm

Back RBI acts to rein in inflation

Our Bureau

Cash reserve ratio hiked; move to suck Rs 14,000 cr from banking system

Tightening policy
Cash reserve ratio hiked 50 basis points in two stages: From 5.5 per cent to 5.75 per cent (effective Feb 17) and then to 6 per cent (March 3)
This is the second instance in the last three months the apex bank has raised CRR

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Mumbai Feb. 13 In a rather swift bid to stay on top of runaway prices, the RBI on Tuesday marked up the Cash Reserve Ratio by 50 basis points to 6 per cent and impound for free about Rs 14,000 crore of bank funds.

The hike in CRR (the percentage of bank deposits locked up for free with the RBI), effective in two phases, will kick in on February 17; the second phase starts on March 3.

It was on December 8, 2006, that the RBI had lifted CRR by 50 basis points to 5.5 per cent, absorbing around Rs 13,500 crore of bank deposits. On January 31, the RBI had increased the repo rate by 25 basis points to 7.5 per cent.

There may be no guesses on banks following up with a mark up in deposit and lending rates though none is sure of the impact on the economic growth running at over 9 per cent.

Yields (prices will drop) are certain to go up in the government and corporate debt markets to make borrowings, across sectors, dear. Over the past few days, financial markets had been expecting a rise in CRR, as it does not cost RBI anything with the held up bank funds not earning interest incomes for banks. Indeed, the second CRR hike could chew off a portion of bank profits in the current fiscal.

Credit growth

The RBI press release cites the "need to contain inflation expectations in the light of the current liquidity conditions," for a second hike in CRR in just over two months. The year-on-year growth in non-food bank credit up to February 2 was 30.2 per cent as against 33.2 per cent a year ago while aggregate deposits swelled by 23.2 per cent over and above 17.5 per cent a year ago, says the RBI release. The central bank had been releasing funds to banks under repo (banks borrow funds from RBI against gilts) from January 8 to February 7 this year. "Now, however, an amount of Rs 3,000 crore, Rs 1,750 crore, Rs 2,155 crore and Rs 4,090 crore was absorbed under reverse repo (banks place excess cash with RBI against gilts) on February 8, 9,12 and 13 respectively as against average daily injections of liquidity of Rs 9,814 crore during February 1-7," the RBI contends. Additional funds of Rs 1,109 crore have been captured till date under the Market Stabilisation Scheme in February.