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Tuesday, April 29, 2008

India Raises Reserves Ratio

India’s central bank tightened cash conditions for the second time in less than a month on Tuesday, stepping up its fight against inflation, and signalled it stood ready to act again if price pressures built up. In a surprise move, the central bank said it was raising its cash reserve ratio (CRR) by 25 basis points to 8.25 per cent with effect from May 24 to control inflation-stoking cash in the banking system. It kept all other official rates unchanged.

The increase in the CRR, or the amount of funds banks have to keep on deposit with the central bank, follows a surprise announcement less than two weeks ago raising the ratio to 8 per cent in two stages of 25 basis points each. The first increase has already taken place and the second will be effective from May 10.

The central bank kept its key lending rate steady at 7.75 per cent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6.0 per cent. It has kept the repo rate steady for the past year after raising it five times between mid-2006 and March 2007 to address signs of overheating in the economy.

The bank forecast economic growth would slow in the fiscal year that began this month to a range of 8.0 per cent to 8.5 per cent from an estimated 8.7 per cent in 2007/08.

It said it aimed to push inflation back to ”around 5.5 per cent” this fiscal year, but with the goal of lowering it close to 5.0 per cent as soon as possible.

India's inflation accelerated to what is nearly the fastest pace in more than three years at the begining of April, maintaining pressure on the central bank to do more to restrain prices after squeezing the money supply last week. Wholesale prices rose 7.33 percent in the week ended April 12 from a year earlier, after gaining 7.14 percent in the previous week and 7.41 percent the week before, the Ministry of Commerce and Industry said in New Delhi today.

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