Joining the government in battling the skyrocketing inflation, the Reserve Bank of India (RBI) today hiked the cash reserve ratio (CRR) by 50 basis points to 8%. The ratio indicates the amount of money banks have to keep with RBI as a percentage of their liabilities (deposits).
The rate hike will be introduced in two stages. In the first stage, RBI will raise CRR by 25 basis points to 7.75% on April 26. Another 25 basis point hike will come into effect from May 10, 2008.
As a result of the increase in CRR, about Rs 18,500 crore of'banks resources would be taken out of the system, RBI said in statement.
The inflation, measured by the wholesale price index (WPI), has shot up to 7.41% in the last week of March and remained above 7% in the first week of April.
The overall impact on inflation expectations requires to be monitored and moderated, RBI said.
Liquidity has grown substantially in first two weeks of April. It is one of the factors that stokes inflation. The liquidity adjustment facility (LAF) had been in an injection mode persistently during the second half of March.
Subsequently, there was a large turnaround and an average amount of Rs 40,088 crore was absorbed through the LAF during April 3-17, 2008 as against the average daily injection of Rs. 27,385 crore during March 17-31, 2008.
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