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The Reserve Bank of India (RBI) in its monetary policy review on Friday, hiked the Cash Reserve Ratio (CRR) by 75 basis points to 5.75 percent in a bid to hold excess liquidity to combat the rising inflation. The repo and reverse repo rates remained unchanged.

The increase in CRR will be done in two ways. The first one will be for 50 basis points with effect from February 13, 2010 and the balance 25 basis points will be effective from February 27. This will drain out Rs 36,000 crore from the system in the long run.

Repo rate is the rate at which the banks can borrow money from RBI in order to avoid scarcity of funds.
This step taken by the RBI comes followed by the spiraling inflation. Food inflation touched 17.4 percent for the week ended 16 January 2010, slightly higher than previous week''s 16.81 percent.

HDFC Bank Vice Chairman and Managing Director Keki Mistry said, "CRR hike won''t affect interest rates much. But with this bond yields might start moving marginally higher. We expect banks to start exercising a bit of caution from hereon."

JP Morgan Chase Chief Economist India Jahangir Aziz said, "We didn''t expect a 75 bps hike in CRR. We are not in a situation where you need to pump in liquidity."

Fuel price index rose to 5.7 percent while primary articles price index touched 14.66 percent for the week ended 16 January 2010.

The RBI median forecast in the pre-policy said, "Macroeconomic and Monetary Developments: Third Quarter Review 2009-10 yesterday raised the economic growth projection to 6.9 percent from the 6 percent projected three months ago."

Chief Statistician of India Pronab Sen has indicated that the Wholesale Price Index (WPI)-based inflation, which rose from sub-zero level last year to 7.3 percent in December, is expected to cross 9 percent by the end of March.

Inflation has become a source of worry both for the RBI and the government in recent times with the wholesale price index (WPI) inflation hitting 7.3 percent in November and food price inflation ruling at 17.4 per cent. (ANI)