Oommen A. Ninan

MUMBAI: In a determined move to contain overshooting inflation and inflation expectation, the Reserve Bank of India (RBI) on Tuesday raised the Cash Reserve Ratio (CRR) — the portion of deposits banks must keep aside — by 0.25 percentage points to 8.25 per cent with effect from May 24.

This will shore up another Rs. 9,000 crore from the banking system.

With this, the RBI will mop up around Rs. 27,500 crore from the system to contain liquidity.

That includes an estimated Rs.18,500 crore that was to be mopped up in two stages consequent on a 0.50 percentage point CRR hike by the RBI on April 17.

Pointing out that price stability, anchoring inflation expectations and orderly conditions in financial markets were the priorities while sustaining the growth momentum, RBI Governor Y.V. Reddy, announcing the Annual Policy for 2008-09, said: “The only pressure point is inflation.

The major focus now is on inflation … We could comfortably continue the growth momentum at 8 to 8.5 per cent.”

However, “we should bring down inflation to 5.5 per cent from the current 7 per cent.”

He said the resolve was to condition policy and perceptions of inflation in the range of 4-4.5 per cent “so that an inflation rate of around 3 per cent becomes a medium-term objective.”

However, the central bank preferred not to increase the Bank Rate (6 per cent) and short-term lending and borrowing rates of banks, repo (7.75 per cent) and reverse repo rate (6 per cent).

The repo rate is the rate at which the RBI lends money to banks and the reverse repo rate is the rate at which the RBI borrows from banks.

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