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RBI Hikes CRR by 0.5% to 6%

February 13, 2007

With the Indian inflation at record high, 6.58 %, the Finance Minsitry had no other option but to cool the overheated economy. The Reserve Bank of India, just minutes ago announced the hike in Cash Reserve Ratio by 50 bps to 6%. This hike would suck Rs 14,000 crore away from the system.

In order to manage short term liquidity crisis, RBI has proposed the CRR hike in two phases with the second phase to come into effect after Budget on March-3rd.

RBI in a press release said,

It may be recalled that in the Third Quarter Review of the Annual Statement on Monetary Policy for the year 2006-07, the stance of monetary policy was set out. The Review inter alia stated :

“Hence, a determined and co-ordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion. To the extent the current inflationary pressures are attributable to monetary conditions, it is essential to undertake appropriate measures, in continuation of those already taken and in the light of anticipated developments.” (paragraph 77)

SBI CFO said that the lending rates will increase not just to the overheated Real Estate borrowers but also to all other borrowers. Banking stocks will be under pressure and the market correction is likely to continue tomorrow.

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