RBI increases Cash Reserve Ratio (CRR)

It may be recalled that there was a Mid-Term Review of Annual Policy Statement for the year 2006-07 on October 31, 2006. In the section on the Stance of Monetary Policy for the second half of 2006-07, it was stated that: "Furthermore, containing inflation expectations in the current environment and consolidating gains achieved so far in regard to stability would warrant appropriate, immediate measures and willingness to take recourse to all possible measures in response to evolving circumstances promptly. The objective is to continue to maintain conditions of stability that contribute to sustaining the momentum of growth on an enduring basis. Towards this objective, the monetary policy stance and measures will need to be in a process of careful rebalancing and timely adjustment".

In this regard, there have been significant developments, particularly on the domestic front. These include:

(a) Real GDP growth at 9.2 per cent during July-September 2006 and 9.1 per cent in the first half of 2006-07.

(b) Year-on-year increase in non-food bank credit up to November 24, 2006 was 30.1 per cent on top of an increase of 31.1 per cent a year ago.

(c) Year-on-year money supply (M3) growth at 19.4 per cent by November 24, 2006, up from 17.3 per cent a year ago.

(d) Year-on-year expansion in reserve money as on November 24, 2006 was 17.5 per cent, higher than 14.9 per cent a year ago.

(e) Additional liquidity amounting to Rs.12,342 crore was absorbed under the market stabilisation scheme (MSS) during 2006-07 up to November 2006. The balances under the MSS increased from Rs.29,000 crore on March 31, 2006 to Rs.39,233 crore by November 30, 2006.

(f) Year-on-year WPI inflation has risen from 4.1 per cent at end-March 2006 to 5.3 per cent as on November 25, 2006 higher than 4.5 per cent a year ago.

(g) Year-on-year inflation based on the consumer price index (CPI) for industrial workers, urban non-manual employees, agricultural labourers and rural labourers are 7.3 per cent, 7.2 per cent, 8.4 per cent and 8.1 per cent in October 2006 from 4.2 per cent, 4.6 per cent, 3.2 per cent and 3.2 per cent, respectively a year ago.

(h) As per the RBI’s Industrial Outlook survey, a majority of respondents from the private corporate sector expect higher increase in prices of both inputs and outputs. There are reports of growing strains on domestic capacity utilisation. There are also reports that expansion of capacity is underway but the realisation could be constrained over the next two years.

However, the conditions in financial markets continue to be stable and orderly.

A seasonal decline in prices of food articles could moderate the inflation pressures but the WPI inflation excluding food articles is close to 5.0 per cent. The recent reduction in prices of petrol and diesel will moderate inflation, but the overall impact on inflation expectations requires to be monitored and moderated.

The external sector continues to be strong and current account deficit is likely to be close to the trend, and will continue to be accommodated by net capital flows. However, it is necessary to recognize the challenges emanating from capital flows and consequent impact on increasing liquidity.

In view of the above, it has been decided to increase CRR of the scheduled commercial banks, regional rural banks (RRBs), scheduled state co-operative banks and scheduled primary (urban) co-operative banking system by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from specified fortnights as indicated below:

Effective date (i.e. the fortnight beginning from)	CRR on net demand and time liabilities (per cent)
December 23, 2006	5.25
January 06, 2007	5.50

As a result of the above increases in CRR on liabilities to banking system, an amount of about Rs.13,500 crore of resources of banks would be absorbed.

Source : Equity Bulls

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