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Old 01-29-2010, 06:02 AM
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Default Breaking News: RBI hikes CRR by 75 bps to 5.75%

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MUMBAI: The RBI has increased cash reserve ratio by 75 bps to 5.75%, whereas key interest rates were unchanged in its third quarter review ofthe Annual Monetary Policy.

CRR hike would suck out Rs 36,000 crore liquidity from the system. The hike would happen in two stages, the first stage of hike of 50 bps will be effective from February 13 and the next 25 bps from February 27. RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%.

RBI projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year. It also said that the inflation would be around 8.5% in March.

This policy will, thus, be the first major move to mark the reversal of the easy money policy adopted since October 2008. A CRR hike has not come as a shocker for markets as the same has largely been factored into expectations.

Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term.

Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.

The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.

"With a stronger recovery in India, the risk of food price inflation causing generalized inflation cannot be ignored," the RBI said in a report on Thursday.

After cooling off for three consecutive weeks, food inflation was back on an upward trail. It rose to 17% on January 16 — from 16.81% a week earlier — on the back of rebounding prices of eggs and vegetables.

Food inflation had come down to 16.81% in the preceding week (January 9) after spotting the 20% mark in December, the highest in a decade.

High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till September last year.

Industrial output grew 11.7 per cent in November from a year earlier, as stimulus measures since October 2008 to overcome the global credit crunch supported domestic demand.

As expected this step of the Central Bank could be observed in the line of an exit from an accommodative monetary policy in its quarterly credit policy review. Analysts taking cue from last policy review had been expecting the RBI is to begin gradually exiting its year-old accomodative monetary stance starting in early 2010, as signs emerge of a pick up in growth and inflationary pressures rise.
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