Reserve Bank of India on Thursday announced the hike in cash reserve ratio (CRR) by 50 basis points in two phases to 8% in the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to contain the rising inflation.
In the first stage, CRR will be hiked by 25 bps from the fortnight beginning from April 26, which will be later hiked to 50 bps from the fortnight beginning from May 10. As a result of the above increase in CRR on liabilities of the banking system, an amount of about Rs 185 billion of resources of banks would be absorbed.
Over the period ahead, liquidity management will continue to assume priority in the conduct of monetary policy. It was further stated that the liquidity conditions are being shaped by several underlying factors and their developments have implications for liquidity management going forward and warrant appropriate and timely action, RBI said.
The liquidity adjustment facility (LAF) had been in an injection mode persistently during the second half of March 2008. Subsequently, there was a large turnaround and, an average amount of Rs 400.88 billion was absorbed through the LAF during Apr. 3-17, 2008 as against average daily injection of liquidity of Rs 273.85 billion during Mar. 17-31, 2008.
Year-on-year WPI inflation, which was 3.83% on Jan. 12, 2008, i.e., at the time of the announcement of third quarter review, increased to 7.41% on Mar. 29, 2008 and remained at 7.14% as on Apr. 5, 2008 and its overall impact on inflation expectations requires to be monitored and moderated.
On a review of current liquidity situation, it is considered desirable to increase the CRR of the 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% in two stages, RBI added.