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Reddy sucks out extra cash
Apex bank hikes CRR to 7.5 %

Mumbai, Oct. 30: The Reserve Bank of India (RBI) today raised the cash reserve ratio (CRR) by 50 basis points to mop up excess liquidity and prevent a flare-up in inflation.

Though Reserve Bank governor Yaga Venugopal Reddy caught bankers napping by hiking the CRR to 7.5 per cent, his decision to keep other key policy rates unchanged in the central bank’s mid-term credit policy review was along expected lines.

By raising the CRR, the central bank expects to suck out Rs 16,000 crore from the system. CRR is that portion of deposits which banks keep with the RBI.

The increase will take effect from the fortnight beginning November 10.

Reddy kept intact the other key rates — the reverse repo, repo and bank rate — at 6 per cent, 7.75 per cent and 6 per cent, respectively. Policy-makers are getting the creeps over the growth rate in money supply, which at 17-17.5 per cent is well above projections.

Adding to the uneasiness is RBI’s intervention in the foreign exchange market to protect the rupee, which is adding to the liquidity overhang.

The review said that the RBI would continue with the policy of active demand management of liquidity through appropriate use of CRR and open market operations.

All policy instruments will be used flexibly, as and when the situation warrants.

Later, Reddy told journalists that “the decision to absorb Rs 16,000 crore out of the Rs 30,000 crore excess liquidity was taken so that it may not be used for speculation. Economic growth will take care of the remaining liquidity.”

He retained the GDP growth forecast for this fiscal at 8.5 per cent and said inflation would be kept below 5 per cent.

However, underlying pressures on prices remain, from crude oil and availability of food items.

FM support

Finance minister P. Chidambaram today backed the decision to raise CRR but hoped that economic growth would beat the central bank’s projection of 8.5 per cent for this fiscal.

He said the RBI had emphasised the need to be vigilant on the expenditure side and respond with appropriate short and medium-term measures in the event of global shocks.

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