RBI to increase rates to curtail inflation

August 24, 2008	(Be the first to rate this story!)  Loading ...
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To check inflation India’s central bank, the Reserve Bank of India (RBI), will announce a 0.25 percent increase in the Cash Reserve Ratio (CRR), effective from September 1. “If the liquidity in the system is on the higher side it leads to inflationary pressures,” said A Thangavelu, General Manager, Eastern Exchange, on deputation from Canara Bank, India. “There is a strong possibility of RBI hiking the various interest rates like the CRR, repo and reverse repo to curtail the inflationary trend.” Indeed, if the excess liquidity is not addressed, it will create inflation pressures and could be used for speculative purposes.

As part of the measures to mop up excess funds, the Reserve Bank of India had hiked the Cash Reserve Ratio (CRR) by 50 basis points to 7.5 per cent in November last year. This had taken out approximately Rs160, 000 million from the system, while the liquidity overhang is to the extent of about Rs300, 000 million. This was the second hike last year. The CRR was increased in July by 50 basis points to seven percent. The CRR is the proportion of deposits banks have to park with the RBI for statutory requirement. Banks do not earn any interest on cash reserves. Explaining the reasons for high inflation in India, Vishal Chauhan, Unit Head, NRI Banking, and Commercialbank, pointed out three main issues – the demand pull, the cost push and the overall bank rates.

The high liquidity in the system has propelled the inflation in India. Experts had forecast that the inflation rate would reach the 13 percent and it will peak at between 13 and 14 percent in the coming two to three months on the back of high oil, steel, cement and food prices. Inflation has got a cyclic trend and any developing economy will have to pass through this trend.

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