Mumbai, July 29
The Reserve Bank of India today raised the Cash Reserve Ratio (CRR) and the repo rate as part of efforts to tighten liquidity in its battle against inflation.

Announcing the new measures as part of the apex bank's first quarter review of the annual credit policy, RBI Governor Y.V. Reddy said the repo rate would be increased increased by 50 basis points from 8.5 per cent to 9 per cent.

Cash Reserve Ratio or the percentage of deposits which banks must keep with the Central Bank would also be increased by 25 basis points to 9 per cent with effect from the fortnight beginning August 30, 2008, Reddy said.

However, the RBI has left bank rate and reverse repo rate under LAF unchanged.

Dr Reddy hoped that inflation would moderate by the third quarter this year and fall sharply to around 7 per cent by the year-end if the RBI's anti-inflationary measures pan out as expected.

Following the tightening of money supply, the apex bank revised the GDP growth projection for 2008-09 to 8 per cent from the earlier 8-8.5 per cent barring external shocks. The economy had grown at the rate of 9 per cent in the past years. "While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5 per cent as soon as possible and around 3 per cent over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12 per cent to a level close to 7 per cent by March 31, 2009," Dr Reddy said.

The apex bank noted that earlier attempts by it to moderate money supply is already showing results though these have been lower than expected and thus "warranting continuous vigilance and appropriate and timely policy responses".

Dr Reddy also noted that the apex bank had adequate headroom available to implement further measures "in the deployment of instruments, complemented by prudential regulations and instruments for capital account management".

Sounding a note of warning to banks that have been on a lending spree, growth in GDP ahead of expectations. “Real GDP growth in 2007-08 was revised upwards to 9 per cent by the Central Statistical Organisation (CSO) in its end-May 2008 estimates from the advance estimates of 8.7 per cent released in February 2008,” Dr Reddy said.