Reserve Bank of India holds repo, reverse repo rates; raises cash reserve ratio on inflation fears

The Reserve Bank of India (RBI) has pushed up its cash reserve ratio (CRR)  higher than forecasted while holding the repo and reverse repo rates steady in an attempt to tackle the country’s rising inflation.

In its Monetary Policy review today, the CRR - the percentage of cash deposits that lenders must set aside with the central bank - is up by 75 basis points (bps) to 5.75%. The repurchase, or overnight lending rate, remained at 4.75% and the reverse repo rate stays at 3.25%.

Many economist expected a 50 bps raise, according to an online poll by a newswire, The RBI raised its inflation estimate for end-March to 8.5% from 6.5%. It now expects the economy to expand 7.5% in the current fiscal year through March, up from a previous forecast of 6%.

The RBI has been aggressive in its support for the capital markets, particularly since the default of Lehman Brothers in the US that hit global markets. In October 2008 it opened a repo auction to meet the liquidity requirements of mutual funds, and allowed banks to take money from apex bank against the government securities, to provide to mutual fund industry. By 3^rd November of that year it had cut the repo rate by 0.5%

Last January the RBI assured continued liquidity support to market participants even as it kept key interest rates unchanged in its third quarter review of monetary policy for 2008-09. By October, it began to wind down the liquidity support measures.

Finance secretary Ashok Chawla called today’s CRR hike "appropriate and adequate".