CRR hike slightly aggressive, rates not seen rising

Economists were 'slightly surprised' by the extent of the cash reserve ratio hike (of 0.75 per cent) but felt that the Reserve Bank of India's move was strongly influenced by rising inflationary pressures and the compelling need to rein them in.

"The market was expecting a 0.50 per cent hike in CRR--I feel the 0.75 per cent is slightly aggressive. It is more a pre-emptive move to control inflationary expectations," Bank of Baroda's chief economist, Rupa Rege-Nitsure, told PTI.

The Reserve Bank on Friday upped the cash reserve ratio from 5 per cent to 5.75 per cent, a move expected to flush-out Rs 36,000-crore (Rs 360-billion) from the system.

It also pegged expected inflation by end-March at 8.5 per cent, sharply up from its earlier projection of 6.5 per cent.

"The move is targeted at combating the liquidity over-hang in the system," Nitsure said. Crisil's director and principal economist, D K Joshi, said, "Today's move is a clear enunciation that inflation has emerged as a major concern for the RBI. This is clear from the fact that the apex bank hiked CRR by 0.75 per cent instead of by the widely-expected 0.50 per cent."

While interest rate pressures are seen, there may not be an immediate increase in rates, the economists said.

"Rate hikes would depend on the overall growth dynamics.

The Reserve Bank has clearly said that it would continue to nurture growth while combating inflation," Yes Bank's chief economist, Shubhada Rao, said.

"Rate hikes are unlikely in the immediate horizon as economic growth is still on the agenda. I don't see banks upping their interest rates--at least, not yet," Rao said, adding liquidity was comfortable and would remain comfortable even after the two-tranche CRR hike announced on Friday.

Crisil's Joshi described the RBI's GDP growth projection of 7.5 per cent by March as 'pleasant surprise. This is a sharp (upward) revision--and a pleasant surprise,' he said.