MUMBAI: In a move to tighten liquidity in the system further to contain inflationary pressures, the Reserve Bank of India (RBI) on Tuesday raised the Cash Reserve Ratio (CRR) from 5.50 to 6 per cent in two phases — with effect from February 17 to 5.75 per cent and from March 3 to 6 per cent. This measure would absorb about Rs. 14,000 crore of resources of banks

Tuesday's decision comes on top of a 0.50 percentage point increase in CRR effected by the apex bank in December 2006 to impound Rs. 13,500 crore. All scheduled banks are required to maintain a cash reserve by keeping a specified percentage of their net demand and time liabilities (NDTL) as current account balance with the RBI — this is known as CRR.

Determined effort

"In view of the paramount need to contain inflation expectations and in the light of current liquidity conditions, it has been decided to increase the CRR of scheduled commercial banks (SCBs), regional rural banks (RRBs), scheduled co-operative banks and scheduled primary (urban) co-operative banks by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from the fortnights beginning from February 17 at 5.75 and March 3 at 6 per cent. As a result of the increases in the CRR, an amount of about Rs. 14,000 crore of resources of banks would be absorbed,'' the RBI stated.

Third quarter review

In the third quarter review of January 31, 2007, the RBI had indicated that: "The Reserve Bank would use all policy instruments, including the CRR, to ensure the appropriate modulation of liquidity in responding to the evolving situation.''

It also added, "Hence, a determined and co-ordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion. To the extent the current inflationary pressures are attributable to monetary conditions, it is essential to undertake appropriate measures, in continuation of those already taken and in the light of anticipated developments.''

Since the issue of the third quarter review, the RBI noted, "there have been some notable developments.'' These included advance estimates of national income, placing real GDP growth for 2006-07 at 9.2 per cent on top of 9 per cent in 2005-06, a rise of 10.8 per cent in the general index of industrial production during April-December, 2006 as against 8 per cent a year ago, and increase in the year-on-year inflation based on the wholesale price index (WPI), from 6 per cent on January 13, 2007, to 6.6 per cent on January 27, 2007, as released on February 9, 2007.

Further RBI noted that the year-on-year growth in non-food bank credit up to February 2, 2007 was 30.2 per cent as against 33.2 per cent a year ago and the year-on-year growth of aggregate deposits was 23.2 per cent up to February 2, 2007, over and above 17.5 per cent a year ago.

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