RBI hikes CRR by 75 bps to 5.75% in two stages

The Reserve Bank of India has hiked its cash reserve ratio by 75 bps to 5.75% as against 5% at its credit policy meet today. (100 basis points=1%) A CNBC-TV18 poll had forecasted a 50 bps CRR hike.The move will be implemented in two stages. The first 50 bps hike will come into effect on February 13 while the next 25 bps hike will be effective February 27. The move will result in a mop-up of Rs 36,000 crore by February end. The central bank has left unchanged the reverse repo, repo, and bank rate at 3.25%, 4.75%, and 6% respectively.
Rationale for the hike:
D Subbarao, Governor, RBI, says the confidence in recovery justifies reversing the expansionary policy. He acknowledged that the recovery yet to fully take hold. "The policy at current levels was more consistent with the crisis situation. Our interest rate stance will balance price stability and support growth" Industrial production in November 2009 grew at 11.7%, the fastest in the last two years.
Expected Outcomes
- Reduction in excess liquidity will help anchor inflationary expectations.
- The recovery process will be supported without compromising price stability.
- The calibrated exit will align policy instruments with the current and evolving state of the economy.
Road ahead:
The governor says it necessary to carry forward the process of exit further. But was quick to add that strong anti-inflationary steps may undermine the recovery process. The Monetary Policy for 2010-11 will be announced on April 20.
GDP forecast:
It has revised its FY11 growth forecast of 7.5% from 6% earlier. The forecast assumes 0% agricultural growth and continued recovery in industry services.
Inflation:
The March-end inflation forecast has been upped to 8.5% from 6.5%. The governor has promised to respond to inflation swiftly via policy adjustments.
Growth forecasts scaled lower:
Credit growth forecast has been lowered to 16% from 18%. Deposit growth expectation has also been downsized to 16% from 18%. M3 growth forecast has been revised to 16.5% from 17%
Bankers say that even if the CRR is raised, they have no leeway to raise rates because nobody is demanding money much these days