RBI hikes CRR by .5%

Mumbai: Belying expectations of any relief on interest rate front, the Reserve Bank of India on Tuesday announced an increase in the Cash Reserve Ratio (CRR) for all banks by 0.5 per cent to 7.5 per cent from November 10, but left key interest rates unchanged.

Cash Reserve Ratio is the ratio of interest-free cash

reserves mandatorily kept by the banks with the RBI. Between December 2006 and July 2007, RBI has raised CRR by 2 percentage points to 7 per cent and has sucked out about Rs 56,000 crore from the financial system.

Announcing the monetary policy review, RBI Governor YV Reddy retained the GDP forecast at 8.5 per cent for 2007-08 while the inflation target was kept close to 5 per cent this year.

The bank rate remains unchanged at 6 per cent, while repo rate stays at 7.75 per cent and reverse repo rate at 6 per cent.

Reddy said the Central bank has resolved to keep inflation expectations in the range of 4-4.5 per cent with an objective to bring it down to 3 per cent in the medium term. The inflation rate, at present, has been hovering at around 3.07 per cent.

To curb the menace of recovery agents, RBI has asked banks to prescribe to specific considerations while engaging recovery agents.

"An urgent need has risen to review the policy, practice, procedures involved in engagement of recovery agents by banks in India," it said.

The Central bank said it will issue an operational circular for banks on recovery agents by November 15. The bank is also considering a temporary or permanent ban on hiring recovery agents by banks.

On the economic growth projections, the RBI continued to focus its attention on keeping inflation low notwithstanding the fact that interest rates have begun to impede the growth momentum.

The apex bank also sent strong signals it will continue its hawkish policy to ensure price stability, credit quality and orderly conditions in the financial market.

The bank also announced its decision to allow "short sale" and "when issued" transactions outside negotiated dealing system-order matching platform. In another key decision, the RBI permitted oil companies to hedge foreign exchange on overseas OTC exchange. The bank will announce the next monetary policy review on January 29, 2008.

The apex bank said equity prices were at record highs and although inflation, in terms of wholesale prices appears to have eased, remains high in terms of consumer prices.

Highlights of RBI monetary policy review

> CRR hiked by 0.5 pc to 7.5 per cent from Nov 10

> Bank, repo, reverse repo rates unchanged

> GDP growth outlook unchanged at 8.5 pc for 2007-08

> Inflation to be contained close to 5 per cent in FY'08

> Inflation expectation in range of 4-4.5 per cent

> Medium term objective on inflation is 3 per cent

> Oil companies permitted to hedge foreign exchange on overseas OTC exchange.

> Importers and exporters allowed call, put options

> Authorised dealers permitted to offer American Options

> Working group on RRB, core banking roadmap

> Financial aid to RRBs for IT implementation

> Action plan for National Electronic Clearing Service

> Hi-level committee to review lead bank scheme

Implications: -

> Don't expect interest rates to come down. For, Cash Reserve Ratio is the ratio of interest-free cash reserves mandatorily kept by the banks with the RBI. Had it been unchanged, it could have provided banks an option to ease the lending rates.

> Key interest rates like home loan rates to remain unchanged.

> Tight leach on inflation continues as the hike in CRR will suck out extra liquidity from the system.

> Tight money policy may affect industrial growth expectations. Markets may see more volatility in the coming days.

(With PTI inputs)

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#Reserve Bank of India #Monetary Review Policy #YV Reddy