CRR hiked by 50 basis points to check inflation

April 17th, 2008 - 10:15 pm ICT by admin  

A file-photo of Manmohan Singh

Mumbai, April 17 (IANS) With India’s inflation rate ruling at four-year high, the central bank Thursday increased the cash reserve ratio (CRR) by 50 basis points to suck out excess liquidity out of the financial system. The move comes just a day after Reserve Bank of India (RBI) Governor Y.V Reddy said in New York that he would take necessary steps to rein in inflation which is at 7.14 percent for the week ending April 5.

The central bank said that after reviewing monetary and anticipated liquidity conditions and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis.

It said on a review of current liquidity situation it was considered desirable to increase the CRR of the scheduled commercial banks, regional rural banks (RRBs), scheduled state cooperative banks and scheduled primary (urban) cooperative banks by 50 basis points to 8 percent.

The hike will be implemented in two stages - it will be raised to 7.75 percent April 26 and 8 percent by May 10.

The CRR is the minimum amount of cash which commercial banks have to hold and this instrument is often used by central banks to bring down inflation by checking the money supply.

An average amount of Rs.400.88 billion was absorbed through the liquidity adjustment facility (LAF) during April 3-17, 2008 as against average daily injection of liquidity of Rs.273.85 billion during March 17-31, 2008, the central bank said.

The Manmohan Singh government has come under criticism for rising prices of food grains and other essential commodities.

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