Posts Tagged ‘price stability’

RBI Increases CRR, Kicked off its War against Inflation

RBI Increases CRR, Kicked off its War against Inflation

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The Reserve Bank of India (RBI) has kicked off its war against inflation and build-up of inflationary pressures by announcing a surprise increase of 75 basis points in the Cash Reserve Ratio (CRR).

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Cash reserve ratio is the minimum liquid assets, banks have to retain against deposits or park with the central bank in the form of government securities.

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The CRR will be hiked in two stages : 50 basis points from Feb 13 and another 25 basis from Feb 27 – from the present 5 percent, Reserve Bank of India (RBI) Governor D Subbarao told.

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However, in a cautious move not to disrupt the money supply, the RBI left the key policy rates – repo and reverse repo – unchanged.

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“As a result of this increase in the CRR, about Rs.36,000 crore of excess liquidity will be absorbed from the system,” Subbarao added, as he presented the third quarterly update of the central bank’s monetary policy for this fiscal.

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Subbarao said the cut in excess liquidity will help anchor inflationary expectations and that the recovery process of the economy will be supported without compromising on price stability.

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As inflation was steadily growing and the economy was slowly returning to higher growth trajectory, it was expected that the RBI would tighten monetary policy.

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But the 75-bps hike, according to investors, is a “more hawkish” move than many expected.

The market had expected and was prepared for a 50-bps hike.

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Central bank has said the action was necessary as the “rapidly rising” food inflation was putting pressure on other sectors as well.

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India’s inflation jumped to 7.31 percent in December, 2009 from 4.78 percent in November, mainly driven by high food prices.

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The questions cropping up as a result of this move are :

-Will this move by the central bank going to check the inflation?

-Moreover, what implications this step holds for the economic growth?

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Stay Tuned for More.. 🙂

RBI’s Monetary Policy – Analyst View

Hello Friends, last month we witnessed loads of action with the RBI’s monetary policy being laid down.

Just an extension of our previous blog “RBI’s Monetary Policy Stance – Part 3.

 

 

Analyst View RBI policy

RBI Monetary Policies and Projections Part 4

 


In this Blog we would read the Analyst views with respect to the monetary point of view.

Analysis from the Analyst from monetary point of view:

Though there is a hike in SLR to 25 % but we think it will not have much more impact because the total investment book of commercial banks is already at 30.4% of total NDTL.

Although key rates of CRR, reverse repo and repo rates have been left unchanged, special repo facilities have been withdrawn.

Real estate loans provisioning are set to become more expensive.

NPA norms for banks have been tightened while liabilities of scheduled banks arising from transactions in CBLO with Clearing Corporation of India Ltd. (CCIL) will be subject to maintenance of CRR.

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The RBI is thus attempting to withdraw liquidity from areas where excess liquidity had reached a point it was more than comfortable with, while also targeting better quality management of credit.

Another point is that in the policy stance, RBI has given first priority to keep a vigil on trends in inflation and to be prepared to respond swiftly and effectively through policy adjustments to stabilize inflation expectations.

Second, it will monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.

Lastly, RBI will maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.

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In conclusion, it bears emphasis that the Reserve Bank is mindful of its fundamental commitment to price stability.

It will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.

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To conclude all the factors it seems that with the withdrawal of special liquidity measures together with an imposition of CRR in borrowing in CBLO market, RBI has taken a first to step towards controlling liquidity.

 

With prioritizing inflation it is expected that the next step of RBI could hike in CRR as it has also reduced the indicative growth of Broad money to 17% from 18%.

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