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CRR up by 0.5%

Mumbai, April 17
The Reserve Bank today hiked the ratio of mandatory deposits that banks need to maintain with it by 50 basis points to suck out about Rs 18,500 crore from the system, complementing efforts of the government to fight price rise.

The decision of the central bank to raise the Cash Reserve Ratio (CRR) from 7.5 per cent to 8 per cent in two phases comes within 24 hours of Finance Minister P Chidambaram assuring the Lok Sabha that RBI would assess the monetary situation and take appropriate action to curb inflation.

Considering the gravity of the price situation, which has pushed inflation to a three-year high of 7.14 per cent, the RBI has tinkered with the monetary policy even ahead of the April 29 announcement of its annual credit policy for 2008-09.

"In the light of the current macro-economic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis," RBI said in a statement.

"On a review of current liquidity situation, it is considered desirable to increase the CRR of the scheduled commercial banks... by 50 basis points to 8 per cent in two stages," it added.

Giving the rationale for the increase in CRR, RBI said year-on-year Wholesale Price Index-based inflation, which was 3.83 per cent on January 12, 2008 (at the time of announcement of third quarterly review of credit policy), increased to 7.41 per cent on March 29 and remained at 7.14 per cent as on April 5 and its overall impact on inflation expectations requires to be monitored and moderated.

The hike in CRR may lead to tightening of money supply, forcing banks to raise lending and deposit rates. PTI

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