RBI hikes CRR by 0.50% to confront Inflation

Just after a day of Finance Minister’s speech in Lok Sabha to tame inflation, Reserve Bank of India on Thursday has decided to hike the Cash Reserve Ratio by 50 basis points (0.50%) in two stages. It would first hike 0.25 % CRR by April 26 and then for the second time from May 10 with a same rate of CRR.

The Reserve Bank in a statement said: "It is considered desirable to increase the CRR of scheduled commercial banks, regional rural banks (RRBs), scheduled State co-operative banks and scheduled primary (urban) co-operative banks by 50 basis points to 8 per cent in two stages”.

Union Finance Minister P Chidambaram on Wednesday had appealed RBI Governor Y V Reddy to take some measure to absorb excess of money from the bank system to curtail inflation.

Responding to Lok Sabha over spiralling inflation, the Finance Minister and Agricultural Minister had given clarification in both the houses of Parliament on Wednesday and also informed about new government initiatives to curb inflation.

Chidambaram had also asked Reddy to take some measure in the coming credit policy that is expected to come on April 29, 2008. “RBI Governor might also listening to me….RBI should also take some measure to suck excess money supply from the market”, stated Chidambaram in the Lok Sabha on Wednesday.

In a quick action, RBI governor has raised 0.50 percent CRR that will suck the Rs.18,500-crore from the banking system. It means now banks will have less amount for lending and this curb the credits. The term CRR means ‘banks have to deposit a set ratio money of their total deposits and notes in the Central Bank to contain the liquidity in the market’.

The current CRR is 7.50% and on April 26, it will be 7.75% while on May 01, it would reach to 8%. These moves of RBI will lead the banks to hike the Prime Lending Rate (PLR) that means the chances of hiking interest rate on debts would increased.

Though the banks were expecting this move of RBI, however they are surprised over the CRR hike before meeting the new credit policy. “These moves came against the pressure of rocketing inflation”, said a banker in reaction to new RBI measures.

RBI in a recently released statement said: “In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis.”

The move of RBI will affect the banks’ margin and several banks may also pass their loss to customers but before doing this, they are waiting for new credit policy. However, some banks are still not willing to enhance PLR.

Besides private sector banks, nationalised banks are also likely to adopt ‘wait-and-watch’ policy until their chairmen meet to Finance Minister in the capital scheduling on May 01.

As per latest released data by Wholesale Price Index (WPI), ‘the latest inflation rate for the ending week of April 5 was 7.14%’, while earlier at the end of March, it had reached to the three year’s highest of 7.41 percent.

The declining of this inflation came in the reaction of government’s move to curb inflation in which government has barred the export most important food grains while in other commodities it has discouraged the export of cement and steel by scrapping incentives.

RBI has raised the CRR nine times so far since October 2004.