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CRR Hiked

The RBI announced its annual credit policy today. The CRR rate, which was recently hiked, was once again raised

With a view to control inflation, the Reserve Bank of India (RBI) raised its Cash Reserve Ratio (CRR) by 25 basis points to 8.25% with effect from May 24. All other official rates are kept unchanged. The RBI had increased the CRR rate by 50 bps few days back in addition to today's hike.

The RBI forecasts economic growth of 8.0%-8.5% in the fiscal year that began this month, after an estimated 8.7% in 2007/08. It aimed for inflation of around 5.5% this fiscal year but with the goal of lowering it close to 5% as soon as possible.

The RBI kept its key lending rate unchanged at 7.75% and left the Reverse Repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6.0%. The bank rate, which is used to price medium and long-term loans, remain at 6.0%.

On May 4, we expect about Rs 23,000 crore to come into the market due to bond redemption. This would have negated the increase of 50bps in the CRR that RBI made earlier. Therefore the RBI has increased CRR rates by another 25bps.

We expect some more tightening of liquidity post May 4, 2008 but this would be using other soft measures like selling bonds. Large amounts of Reverse Repo bids were accepted by RBI this morning.

Note by Religare Research