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Wednesday, January 27, 2010

RBI set to raise banks' reserve requirements

24 of 25 economists expect 50 bps increase in the cash reserve ratio (CRR) , or the proportion of deposits banks must keep with the Reserve Bank. That would take the level to 5.5 percent.

Eight of 25 expect a 25 bps increase in reverse repo and repo rates to 5.0 percent and 3.5 percent respectively. Others expect no change in rates at the policy review.

The reverse repo rate is the borrowing rate of the Reserve Bank and is the operational rate now. The repo is the lending rate.


Inflation has surged, primarily driven by a sharp rise in food prices after a weak monsoon. Signs of economic recovery are also evident in strong GDP and industrial output data.

The RBI says the rise in inflation driven by food prices is a supply-side issue monetary policy cannot address. Still, it is worried about inflation pressures spilling over to the broader economy, and will watch for signs of demand-side price pressures in indicators such as asset prices, credit growth, and manufacturing prices.

The widely watched wholesale price index rose in December by 7.3 percent over a year earlier, its fastest pace since November 2008 and jumping from 4.8 percent in November.

Food prices rose 16.81 percent in the 12 months to Jan. 9, easing from a rise of nearly 20 percent in early December.

1 comment:

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