April 20, 2010 by akhilendra

RBI increased CRR by 25 basis points and reviewed its policy

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The RBI on Tuesday hiked short-term lending and borrowing rates and the portion of money banks deposit with it by 25 basis points each, in a move aimed at controlling the inflation,
The apex bank hiked its repo, reverse repo (overnight lending and borrowing rates) to 5.25 per cent and 3.75 per cent, respectively, while the Cash Reserve Ratio or the portion of deposits banks park with RBI, to 6 per cent in line with analysts’ expectations.

The hike in CRR, which will come into effect from April 24, will absorb Rs 12,500-crore excess cash from the banking system. Banks have already indicated that they may not pass on the increased cost to the borrowers immediately as liquidity still remains sufficient in the system.

RBI began exiting its accommodative policy stance in January by hiking CRR to 5.75 per cent and the short term rates by 0.25 per cent each in March.

The RBI stated the FY’11 GDP growth at 8 per cent. It also pegged the wholesale inflation, which is currently hovering close to the double-digits, at 5.5 per cent for FY’ 11.

Warning that demand side pressures have clearly emerged in the economy, the central bank said its medium term objective is to contain the inflation at 3 per cent and reiterated that the policy will be tuned in a calibrated manner to support the recovery process.

“There is clear evidence of demand side pressures building up…with the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalizing our policy instruments,” the RBI said.

Announcing the policy measure, the central bank said it would closely monitor the price situation in the economy and would take further action as warranted.

The central bank, which has visibly shifted its policy priority to inflation from growth, also warned that with growth expected to accelerate next year, capacity constraints are likely to put additional pressure on prices and “there was a need that demand side inflation does not become entrenched.”

On the other side, the huge Rs 4.57 lakh crore government borrowing is likely to pose a bigger challenge to the central bank to manage in the current fiscal as compared to the last year and expressed concerns that this may crowd out the private demand.

Economy has been doing quite well in the last few months and due to shooting inflation rate, rate hike was expected to happen soon. Markets have already calibrated themselves.GDP expectations have gone high and inflation is expected to ease after crop. As mentioned in their statement, move is to ensure control inflation without compromising at growth.

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