RBI moves to douse inflation fire

CRR hiked by 50 bps to 8% in two stages; Rs 18,500 cr to be sucked out by May 10.

With the inflation rate hovering above the 7 per cent level, the Reserve Bank of India today swung into action and announced a 50 basis point increase in the cash reserve ratio "" or the proportion of deposits banks keep at all times with the central bank.

While the RBI said that the CRR will be hiked in two phases to 8 per cent and will suck out Rs 18,500 crore from the system, banks are likely to wait till the RBI's Annual Policy Statement, or the Credit Policy, is unveiled on April 29 before deciding on increasing interest rates.

A 25 basis point rise in the CRR will be effective April 26 and the second rise will be effective May 10. 
 

THE CRR STORY
Date	Rise bps	CRR (%)	Inflation* (%)
23 Dec, 2006	25	5.25	5.80
6 Jan, 2007	25	5.50	6.40
17 Feb, 2007	25	5.75	6.00
3 Mar, 2007	25	6.00	6.50
14 Apr, 2007	25	6.25	6.30
28 Apr, 2007	25	6.50	6.00
4 Aug, 2007	50	7.00	4.40
10 Nov, 2007	50	7.50	3.20
* Inflation based on wholesale price index * Source: RBI

"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 RBI said in a statement.

During the first week of April, inflation based on the wholesale price index was estimated at 7.14 per cent, compared to 7.41 per cent at the end of March, the latest data released by the government today said.

While a higher CRR was expected, bankers said it may not result in an immediate increase in deposit rates. As a result, they are likely to keep rates unchanged for a while. Besides, they expect more measures in the Credit Policy, leaving them with a couple of weeks before taking a final call.

Public sector banks will also wait for cues from the government when their chairmen meet Finance Minister P Chidambaram in New Delhi on May 1.

Banks like State Bank of India and Punjab National Bank, which had reduced their prime lending rates earlier this year following signals from the government and RBI's third quarter review in late January, may be forced to reverse their decision once the full impact of today's move is visible.

A senior State Bank of India executive said that the bank will assess the situation over the next few days, while ICICI Bank Joint Managing Director and Chief Financial Officer Chanda Kochhar said the bank had no plans to raise deposit or lending rates immediately.

"While some amount of liquidity is being absorbed, we will need to watch the situation to see how much liquidity remains in the system before taking any steps to revise rates," said Kochhar. ICICI Bank has seen steady good growth in deposits, including the low-cost current and savings accounts deposits.

Bank of India Chairman and Managing Director TS Narayanasami said the rising yields on g-sec in recent weeks have given it enough cushion to tackle the rise in the cost of funds. "The bank is not in a hurry to revise rates," he said.

"We expect some more steps in the annual policy to contain inflation. We will wait till then before we decide on changing interest rates," Canara Bank Chairman and Managing Director MBN Rao added.

He said banks will also be forced to rebalance their credit portfolio and could go for selective increase in lending rates to certain segments like grain traders.

RBI's move comes after a series of steps initiated by the Centre over the last couple of weeks to increase supply in the market and cool prices at a time when elections are due in crucial states.

The government has banned the export of some food items and is trying to discourage shipments of industrial commodities like steel and cement out of India through bans and withdrawal of duty neutralisation benefits.

The move to suck out cash from the banking system will help check consumer demand and prevent inflation. Since October 2004, RBI has raised the CRR nine times.