Indo-Asian News Service
Mumbai: Reserve Bank of India hiked the cash reserve ratio (CRR) for banks by another 25 basis points on 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 that the CRR was being further hiked to 8.25 per cent, 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 with the RBI - takes effect from May 24. It is expected to suck an estimated Rs80 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 per cent for the week ended on April 12.
The central bank expects the annual inflation rate to slow down to 5.5 per cent by the end of this fiscal.
Reddy, however, kept unchanged the repo rate. The repo rate 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 per cent and six per cent, while the cash reserve ratio, on account of the previous hike, was to go up to up to eight per cent 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 per cent 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 per cent from May 24
- India's growth projection for 2008-09 at 8-8.5 per cent.
- Inflation to be brought down to around 5.5 per cent
- Going forward, inflation to be tamed at 4-4.5 per cent
- Money supply expansion to be moderated to 16.5-17 per cent
- Bank deposits projected to increase by 17 per cent
- Adjusted non-food credit projected to increase by 20 per cent
- 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 Rs3 million