Mumbai, April 29: Reserve Bank governor Yaga Venugopal Reddy today struck a balance between maintaining growth and controlling inflation by raising the cash reserve ratio (CRR) by 25 basis points to 8.25 per cent, while keeping the repo and reverse repo rates unchanged.

The central bank wants to contain inflation at 5.5 per cent in the current fiscal, while the medium-term objective is to bring it down to around 3 per cent.

The CRR hike will suck nearly Rs 9,000 crore out of the banking system.

Today’s hike comes after a 50-basis-point increase announced on April 17, which is being implemented in two tranches of 25 basis points each — April 26 and May 10.

The hike in CRR, which is the portion of bank deposits that must be maintained with the RBI, came as a surprise.

Bond markets and bankers had expected Reddy to increase the repo rate by 25 basis points to control inflation, which had increased to over 7 per cent. A rise in the repo would have led to lending rates going up, thereby impacting growth.

Keeping the country’s growth in mind, the central bank kept the repo and reverse repo rates steady at 7.75 per cent and 6 per cent, respectively.

Repo is the rate at which the central bank injects liquidity into the system.

The reverse repo is the rate at which the central bank absorbs funds from the market.

Explaining the reason behind raising CRR twice in less than two weeks, Reddy told reporters that the decision was taken after “looking at possible liquidity evolution or anticipated liquidity”. He added that underlying demand side pressures persisted in the economy.

“While demand pressures persist, there has been some improvement in the domestic supply response alongside a built-up of additional capacities, enabled by a conducive policy environment,’’ the RBI said in its policy document.

Growth target

The central bank has forecast that the Indian economy will grow between 8 and 8.5 per cent during this fiscal. It based this estimate on the assumption that industrial activity, which has moderated, would pick up as consumption demand revived because of various policy measures such as tax incentives in the budget.

Moreover, investment demand is also expected to remain strong and new capacities are also expected to go on stream in the months ahead.

“Investment demand is robust and likely to remain the driving force of overall economic activity, powered by rising domestic savings and ongoing improvement in productivity,’’ the central bank added. A near-normal rainfall is expected to augur well for agriculture too.

The RBI today said measures would be taken to contain the rate of inflation, which had crossed 7 per cent, at 5.5 per cent in the current fiscal.

“The endeavour would be to bring down the rate of inflation from the current level of above 7 per cent to around 5.5 per cent in 2008-09, with the aim to bring it as close to 5 per cent as soon as possible,’’ the policy document said.

Going forward, the Reserve Bank wants to condition policy and perceptions for inflation to be in the range of 4-4.5 per cent so that in the medium term it can be brought down to around 3 per cent.

The RBI agreed that there was an immediate challenge to tackle volatile food and energy prices.

Though the growth rate may see some moderation because of inflationary pressure, the RBI ruled out any significant slowdown.

Derivative losses

On derivative losses, the RBI said it would review the risk weights, provisioning and capital requirements on such instruments and prescribe certain guidelines to the banks by May 15.

Reddy said while the global experience showed that off-balancesheet exposures of banks were a problem, there were only a few banks in India where such an exposure was large.

“We will review the regulatory framework, prudential and capital requirements,’’ he added.

Last week, ICICI Bank provided $100 million to account for mark-to-market (MTM) losses on its derivative portfolio during the January-March quarter. For the whole year, the provisioning was $170 million.

Earlier, Axis Bank had made a contingent provision of Rs 71.97 crore, revealing the MTM loss suffered by two of its customers.