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| CRR hike balances growth, inflation: RBI |
| Press Trust of India / New Delhi Feb 01, 2010, 19:22 IST |
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 Expressing concern over the rising food prices, the Reserve Bank of India (RBI) today said its move to ask banks to keep more cash with it was a carefully weighed decision to strike a balance between growth and inflation as it will not put an immediate pressure on interest rates.
"Inflation has been driven mainly by rising food prices on the back of shortage of supplies. The wholesale inflation stands at 2.1 per cent if food items are excluded," RBI Governor D Subbarao said at a teleconference.
He added that while surging food prices are a concern, overall inflation is expected to moderate from July.
The Governor said banks have told him that its decision to raise the cash reserve ratio which is the proportion of deposits that banks have to park with the central bank, by 0.75 percentage point will not put an immediate pressure on interest rates as there is abundant liquidity in the system.
The RBI move will suck out Rs 36,000 crore from the system while banks have deposits of Rs 48 lakh crore as on January 15.
Food inflation stood at 17.40 per cent for the week ended January 16 while overall inflation was 7.31 per cent in December.
Subbarao said the RBI considered raising the short-term lending and borrowing (repo and reverse repo) rates but decided in favour of raising the CRR. "The hike was a carefully weighed trade-off between growth and inflation," he said.
The GDP grew by 7.9 per cent in the second quarter of the current fiscal, beating expectations of analysts. In the first quarter, it registered a growth of 6.1 per cent.
Subbarao further said the central bank would continue to carry forward the process of stimulus exit, adding that the recent economic performance has been encouraging.
Following the global financial meltdown in September 2008, the RBI took a host of measures to make liquidity available to the fund-starved industry.
The central bank had reduced the short-term lending (repo) rate by 425 basis points to 4.75 per cent and short-term borrowing (reverse repo) rate by 275 basis points to 3.25 per cent. The RBI had also reduced the cash reverse ratio by 400 basis points to 5 per cent.
With the economy showing signs of recovery and inflationary pressure becoming more and more evident, the RBI in its October policy initiated the first phase of exit by raising the statutory liquidity ratio (SLR)--the portion of funds banks invest in government bonds--by one percentage point to 25 per cent and withdrawing some other steps.
Subbarao also said the government's borrowing won't hurt companies' ability to raise loans, adding that it would be nearly of the same size in the next fiscal. "In gross terms, it might be slightly higher because of redemption," he added.
The government's gross borrowing target in the current fiscal is Rs 4.50 lakh crore.
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