Reddy plays down CRR hike impact

The impact of 50 basis points increase in cash reserve ratio (CRR) required to be maintained by banks was "non-disruptive", said the Reserve Bank of India Governor, Y V Reddy.

"When you have a policy announcement, some re-balancing is required. The re-balancing requires some market participants to take corrective action. Obviously, very few had taken positions that required significant re-balancing," Reddy said.

The RBI increased CRR by 50 basis points in two equal steps effective December 23 and January 6 to 5.5 per cent to suck out Rs 13,500 crore of funds from the banking sector.

"For a large number of large players it was a fairly non-disruptive adjustment in rebalancing, and so as you would have noticed the liquidity conditions are not the volatile element that was seen some time ago," Reddy said. The first stake CRR hike had led to overnight call money rate to touch six-year high of 19.5 per cent.

Reddy said volatility in call money markets last week was owing to a "rebalancing of portfolios" by some banks following an increase in CRR.

"Liquidity conditions are not volatile as we've seen. From all indications, all financial markets,' including the currency market are stable," he said.

Reddy said the inflation figures were in line with expectations and he still expected inflation to be in the RBI's 5.0-5.5 per cent target range by the end of March 2007. "Inflation is by and large on expected lines and (economic) growth has been stronger. As of now, we stick to the inflation range of 5.0-5.5 per cent for end-March," the RBI governor said.

The wholesale price index rose 5.48 per cent in the week ended December 23 from a year earlier, higher than the previous week's annual rise of 5.43 percent. The inflation in the week ended December 23 was the highest since October.

The RBI had hiked CRR as it saw excess money supply as one of the factors fuelling inflation. Money supply was at a high of 19.4 per cent as on December 22, 2006 against 17.8 per cent a year earlier, on an increase in currency with public and time deposits with banks.

"All monetary measures don't have instantaneous effect,'' Reddy said. ``One has to look at the overall context that they have lagged consequences,'' Reddy said.