The Hindu Business Line : RBI hikes cash reserve ratio to 5.5 pc

The RBI today marked up the Cash Reserve Ratio (CRR) from 5 per cent to 5.5 per cent (in two phases) to impound about Rs 13,500 crore of bank funds. CRR will go up from 5 per cent to 5.25 per cent, effective December 23 and on to 5.50 per cent from January 6.The CRR was last raised by one half of one percentage point (two phases) to 4.75 per cent on September 18, 2004 and to 5 per cent effective October 2, 2004.

In the process, the RBI is trying to flush out funds from the system to prevent money chasing goods and adding to inflation. CRR refers to RBI holding back a percentage of bank deposits in cash to control liquidity in the system. In the last few months, dollar inflows have added to rupee resources (banks buy dollars in rupees) in the economy with reverse repo (banks parking excess funds with RBI) absorbing around Rs 25,000 crore to Rs 30,000 crore daily this week. Additional liquidity of Rs 12,342 crore was absorbed under the Market Stabilisation Scheme (MSS) in 2006-07 up to November 2006. The balances under MSS rose from Rs 29,000 crore on March 31, 2006 to Rs 39,233 crore by November 30.

Inflation check

An RBI press release says that a seasonal decline in prices of food articles could moderate inflation pressures but the WPI inflation excluding food articles is close to 5 per cent. The RBI has set an inflation target of 5-5.50 per cent for the current year.

By marking up CRR, the RBI has avoided a straight hike in reverse repo rates. With funds expected to be under leash, the money markets could see yields going up prompting banks to take the cue. It is not sure whether banks will mark up lending rates immediately with the economy growing at around 9 per cent.