Special Correspondent

Interest rate on eligible CRR balances cut to 0.5 p.c.

  • Measures to contain inflation and liquidity in the system
  • Rs. 15,500 crore of banks' resources will be absorbed

    MUMBAI: In a series of measures to contain inflation and liquidity in the system, the Reserve Bank of India (RBI) on Friday further hiked the key indicative short-term lending rate (repo rate) by 0.25 percentage point to 7.75 per cent with immediate effect and the mandatory deposits by banks with RBI (CRR) by 50 basis points in two stages.

    The interest rate applicable on eligible CRR balances (that is, the amount of reserves between the statutory minimum CRR and the CRR prescribed by the RBI) also stands reduced to 0.5 per cent per annum from the present one per cent per annum with effect from the fortnight beginning April 14.

    With an increase in the Cash Reserve Ratio (CRR), "an amount of Rs.15,500 crore of resources of banks would be absorbed,'' the RBI stated.

    Inflation at 6.5 p.c.

    Year-on-year inflation based on the wholesale price index (WPI), has ruled around 6.5 per cent for the third week in succession up to March 17 as per the data released on Friday.

    "The cash reserve ratio (CRR) of banks is being increased by one-half of one percentage point in two stages, effective from the fortnights April 14, 2007 to 6.25 per cent and April 28, 2007 to 6.50 per cent,'' RBI stated in a press release on Friday evening.

    "In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis,'' the RBI stated, while increasing the rates.

    LAF operations

    The markets feel that raising of short-term rate of the RBI will increase the cost of funds further.

    The RBI stated that additional liquidity amounting to Rs.23,894 crore was absorbed under the market stabilisation scheme (MSS) during February 1 March 30, 2007.

    The other arrangements regarding the operations of LAF announced on March 2, 2007, will continue until further notice.

    The policy of withdrawal of semi- durable and durable elements of liquidity through treasury bills and dated securities under MSS will continue.

    The RBI stated that the stance of monetary policy has progressively shifted from an equal emphasis on price stability and growth to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances.

    Beyond tolerance limit

    "The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses,'' the RBI stated.

    Since the monetary measures that were announced on February 13, 2007, there have been some notable developments, RBI stated, namely, the general index of industrial production increased by 11 per cent during April 2006 to January 2007 as against 8 per cent a year ago.

    The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5 per cent as on March 16, 2007, as against 32.7 per cent a year ago. The year-on-year growth in aggregate deposits of SCBs was 24.8 per cent as on March 16, 2007, over and above 18 per cent a year ago.

    External inflows

    Continuation of accelerated external inflows has resulted in accretion of $18.6 billion to the foreign exchange reserves, taking their level from $179.1 billion at the end of January 2007, to $197.7 billion on March 23, 2007.

    Globally, the process of withdrawal of accommodation in monetary policy is being vigorously pursued, RBI stated.

    Since mid-February 2007, the European Central Bank and the Bank of Japan have raised key policy rates by 25 basis points each, while the People's Bank of China raised one-year lending rates by 27 basis points and the reserve requirements by 50 basis points.