RBI Hikes CRR By 50 Bpts

As part of the measures to mop-up excess funds, the Reserve Bank of India on October 30 raised the cash reserve ratio (CRR) by 50 basis points to 7.5 per cent with effect from November 10. This is expected to suck out Rs 16,000 crore from the system, while the liquidity overhang is to the extent of about Rs 30,000 crore.

In the mid-term review of the annual policy announced on October 30, the RBI left the key rates such as repo, reverse repo and bank rate unchanged. CRR was last hiked in July by 50 basis points to 7 per cent. CRR is the proportion of deposits banks have to park with the RBI for statutory requirement. Banks do not earn any interest on cash reserves.

According to the policy, the liquidity increased from Rs 85,770 crore at end-March 2007 to Rs 1,24,632 crore as on August 6, and further to Rs 2,22,582 crore by October 24. The big challenge is the management of capital inflows, which have been in the order of $62 billion during the current fiscal up to October 19. The policy reiterated the RBI projection of GDP growth at 8.5 per cent, assuming no further escalation in international crude prices and barring domestic or external shocks.