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Our Bureau

Mumbai, Oct. 30

As part of the measures to mop-up excess funds, the Reserve Bank of India on Tuesday hiked the cash reserve ratio (CRR) by 50 basis points to 7.5 per cent with effect from November 10. This is expected to suck out Rs 16,000 crore from the system, while the liquidity overhang is to the extent of about Rs 30,000 crore.

In the mid-term review of the annual policy announced on Tuesday, the RBI left the key rates such as repo, reverse repo and bank rate unchanged.

CRR was last hiked in July by 50 basis points to 7 per cent. CRR is the proportion of deposits banks have to park with the RBI for statutory requirement. Banks do not earn any interest on cash reserves.

Explaining the rationale behind the policy measure, the RBI Governor, Dr Y.V. Reddy, said, “If excess liquidity is not addressed, it will create inflation pressures and could be used for speculative purposes.” However, he added, “We have addressed only a part of the liquidity overhang.”

According to the policy, the liquidity increased from Rs 85,770 crore at end-March 2007 to Rs 1,24,632 crore as on August 6, and further to Rs 2,22,582 crore by October 24. The big challenge is the management of capital inflows, which have been in the order of $62 billion during the current fiscal up to October 19.

“Consequently, monetary policy will have to address not only the liquidity overhang, but also incremental flows in the future, if they continue at present levels,” the policy said.

The policy reiterated the RBI projection of GDP growth at 8.5 per cent, assuming no further escalation in international crude prices and barring domestic or external shocks.

“In the next few months based on current indications we don’t see any possibility of any domestic shocks. However, globally there could be shocks, but the assessment is that globally, output growth is not threatened. Therefore, we have retained growth projection at 8.5 per cent,” said Dr Reddy, addressing a press conference.

The policy said that inflation would be contained close to 5 per cent during 2007-08, while resolving to condition expectations in the range of 4-4.5 per cent, with a medium-term objective at around 3 per cent.

The policy also cautioned rapid escalation in asset prices, particularly equity and real estate, which are significantly driven by capital flows.

“We don’t take a view on asset prices, but asset prices – in particular equity and real estate, have been escalating. We are trying to ensure that banks’ balance sheet is not overexposed to such sectors,” he said.

Dr Reddy said, “As far as inflation is concerned, the wholesale price index is evolving as per expectations. The consumer price index is slightly elevated which is a reflection of food price index, but hopefully some normalcy will be restored.

The domestic oil price pass through has not happened so far. So it could involve some element of risk.”

However, he said domestic liquidity, oil price situation, and global uncertainties require greater vigilance.

More Stories on : Monetary Policy | CRR & Bank Rates | Economy | Forex

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