RBI raises CRR by 0.5 percent

The Reserve Bank of India (RBI) today raised the proportion of cash that banks have to keep with them on deposit by 50 basis points to 7.5 percent to mop up excess funds, but kept its key lending rate at 7.75 percent.

Mumbai, Oct 30 : The Reserve Bank of India (RBI) today raised the proportion of cash that banks have to keep with them on deposit by 50 basis points to 7.5 percent to mop up excess funds, but kept its key lending rate at 7.75 percent.

"The status quo of monetary policy can continue. Except one and that is the huge liquidity. Therefore what is overhang of liquidity, we had to take care. Therefore, we have proposed a CRR increase of 50 basis points, which will take care of a part of the overhang of liquidity," said RBI Governor Y V Reddy.

"This does not signify any view about the future evaluation about liquidity or the capital flow. Our response will depend on the way these things will work in the future," he added.

The RBI has kept the Reverse Repo rate unchanged at six percent. This is the rate at which the RBI borrows funds from the market. It impacts government bond yields and short-term bank deposits.

It kept the Repo Rate steady at 7.75 percent. This is the rate at which the central bank adds funds to the money market.

It kept the bank rate unchanged at six percent. Banks use this rate to price their long-term loans to individuals and companies.

The RBI's step on the monetary policy is aimed at:

Reinforcing the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.

It is also to re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.

Further, it is to respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations, financial stability and the growth momentum.

Finally, the bank is ensuring that it is in readiness to take recourse to all possible options to maintain stability and the growth momentum in the economy in view of the unusual heightened global uncertainties, and the unconventional policy responses to the developments in financial markets.

The bank reiterates its power to retain option to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant.

And also it reiterates to retain the option to conduct overnight or longer term repo/reverse repo depending on market conditions and other relevant factors.

The RBI kept the GDP forecast for 2007-08 at 8.5 percent.

The central bank said its policy endeavour would be to keep inflation close to five per cent in 2007-08.

ANI