RBI hikes CRR by 25 bps

In its Credit Policy, the RBI has hiked the CRR by 25 bps to 8.25%. It has left the repo, reverse repo rates unchanged. The RBI aims at 4-4.5% inflation going forward. It is attempting to bring down the inflation to 5.5% in FY09.

The RBI has set the FY09 GDP growth target at 8-8.5%. It is aiming at a credit growth of 20% in FY09. The central bank has upped its home loan limit of 50% risk weight to Rs 30 lakhs from Rs 20 lakhs. The local factors would remain dominant for policy setting, The RBI said. It will continue emphasising on anchoring inflation expectations. It will also ensure a rate environment with high priority to price stability, it said.

The RBI plans to respond swiftly on a continuing basis to evolving situations. Its emphasis would be on credit quality and delivery for sensitive sectors.


The CRR hike that has come in is only a quarter percent; that’s important. It will take out about Rs 9,250 crore. Quite clearly there was no point in hiking the repo rate at a time when banks are not going to the RBI to borrow and therefore the Reserve Bank has first tried to drain liquidity.

So, the stance is very clear. It has made stabilising inflation or price stability the first goal. That is the change in the stance. It is a slight change in language. But it is emphatic that price stability will be the major goal and the entire monetary and interest rate environment will accord highest priority to price stability and well anchored expectations and then financial market stability and then conducive to growth.
The other important point to note however is that despite this huge emphasis on inflation and the stance to drain our liquidity or manage liquidity to ensure inflation expectations.
The other part of the policy is that it is extremely robust or optimistic on growth. What is the growth target? - 8-8.5%. I cannot remember whether any of the brokerages or institutions were giving GDP target of that order. It is extremely optimistic on investment demand. But there is a slight hint that maybe, the RBI is kind of overstating the optimism because at some point, the RBI Governor says that there is a fear of exaggerated bearishness because of the global environment. So, one has to take that phrase also into cognizance.
But setting aside that caveat, it is extremely optimistic on growth. However, the stance seems to be that since growth is definitely taking care of itself, we will concentrate on liquidity. And when it comes to liquidity, the CRR will be the major instrument used.
The other thing that the RBI is very clear on is it is not at all unhappy with the fall in credit growth. Here is another important statistic and forecast from the RBI. They want the banks credit growth to come down to 20%. Remember in the last policy, it was 24-25%, moderated from 32% in the year earlier. Now it says 20%, which means the current credit offtake of 21% is also higher than the RBIs target of 20%. So, it is quite clearly aiming for a situation where liquidity will be drained, banks will not be encouraged to lend left, right and centre. But it believes all this will not impact growth and it will remain at 8-8.5%. Quite clearly, it is a hawkish stance, no two ways about it. There is no hysteria about inflation. There is a cold assessment and acceptance that inflation is going to remain at elevated levels. It is not going away in a hurry.
But the year-end inflation target has been kept at 5.5%. So, that again is an acceptance. Higher inflation, higher growth target - 5.5% is up from 5%; that the RBI had forecasted for FY08.
The other important point is money supply. The target, which was at 17-17.5% and everyone believes that that target will go on increasing because of higher financial inclusion - that target is down to 16.5-17%. That could be to some extent to also modulate it with a slightly lower growth after growth has come down from 8.5-9% and accordingly, the target for M3 has been brought down to 16.5-17%. So, that is really the major part of the monetary policy instruments and stance. Liquidity will be managed very actively by CRR stipulations and the first dose has already come; a quarter percent hike and that will take effect from May 24, which means another Rs 9,250 crore will be drained. In future as well, the accent will be on inflation since growth apparently is taking care of itself.
Meanwhile, the Vice-Chairman of the Planning Commission, Montek Singh said that he does not see the CRR hike putting an upward pressure on interest rates. One is likely to see moderation in inflation over the time, he added. However, Singh feels that the cement prices are not a cause for concern. "The RBI has done what any Central Bank would do to control inflation. It’s the sensible thing to do. With the good monsoon and wheat, we are in a better situation to control price pressure over the next few weeks," he said.