RBI hikes CRR by 75 bps; policy rates left unchanged

The Reserve Bank of India (RBI) never ceases to surprise the markets. It did it again on Friday. As against the consensus expectations of a 50 basis points (bps) hike in the cash reserve ratio (CRR), the RBI hiked it by a wider than anticipated 75 bps to 5.75%. At the same time, the RBI left all other policy rates unchanged. So, the reverse repo has been kept static at 3.25%, as is the repo rate, which remains at 4.75%. The bank rate also stays steady at 6%. The central bank also raised the FY10 GDP forecast, to a much stronger 7.5% from 6% earlier. Inflation target for the current fiscal year has also been hiked to a substantially higher 8.5%, from 6.5% earlier.
The RBI has scaled down the annual non-food credit growth target to 16% from 18% earlier. Money supply (M3) estimate has also been pared to 16.5% from 17% earlier. The projection for deposit growth has been scaled down to 17% from 18% earlier. The 75bps hike in the CRR will suck out Rs360bn from the banking system. The central bank has been receiving about Rs1 lakh crores in excess liquidity from banks over the past several months. The CRR increase will be executed in two stages, the RBI said. The first 50bps hike will be done with effect from Feb. 13 while the balance 25bps will come into effect from Feb. 27.