RBI tightens cash conditions to cool inflation

[Sukumar]

MUMBAI (Reuters) - The Reserve Bank of India (RBI) on Thursday
announced a surprise 50-basis-point increase in banks' reserve
requirements to cool inflation from near three-year peaks, and
analysts did not rule out further steps at an upcoming policy review.

After markets had shut, the RBI said it would raise the cash reserve
ratio (CRR), the amount that banks have to park with it, to 8 percent,
its highest in almost 7 years.

The move follows a slew of duty cuts and export bans ordered by the
government in recent weeks to ease price pressures as policymakers
worry over facing voters at state and general elections due this year
and next.

"I think it will work less visibly than fiscal measures and I don't
think it will bring down inflation below 7 percent in a hurry," said
Abheek Barua, chief economist at HDFC Bank.

"The indication is that they may be planning something more in the
policy and they don't want to pack everything in one day."

The RBI's next policy review is scheduled for April 29.

The repo rate, through which the central bank lends cash to banks, has
remained unchanged for the past year at 7.75 percent.

The CRR was last raised in November, and the latest increase will take
effect in two phases -- the first on April 26 and second on May 10 --
and aims to absorb inflation-fuelling cash from the banking system.

Each of the two increases would be of a quarter percentage point and
will together absorb a total of 185 billion rupees ($4.6 billion) of
cash from the banking system.

"In the light of the current macroeconomic, monetary and anticipated
liquidity conditions, and with a view to containing inflation
expectations, it is essential to take appropriate action on an urgent
basis," the central bank said.

India is not alone in raising reserve requirements. China raised its
ratio for the 16th time since the middle of 2006 to a record 16
percent.


SUPPLY-SIDE DRIVEN

The wholesale price index rose 7.14 percent in the 12 months to April
5, slightly less than expected and falling from the previous week's
rate of 7.41 percent, which was the highest since November 2004.

But the central bank had said it wanted to keep inflation at close to
5 percent by the end of the 2007/08 fiscal year and its medium-term
aim is to contain inflation around 3 percent.

Wholesale inflation has shot up since late last year, more than
doubling since November as India, like other countries, felt the
impact of soaring oil and food prices.

The yield on the 10-year bond rose to its highest in more than nine
months to 8.12 percent on Thursday as traders anticipated an imminent
central bank move.

Piyush Wadhwa, senior vice-president at ICICI Securities, expects the
yield to jump 5-7 basis points on Monday. The market is closed on
Friday for a local holiday.

Reserve Bank of India Governor Yaga Venugopal Reddy said this week
that inflation was at unacceptable levels and that inflation pressures
were rising faster than anticipated, in part due to sharply higher
world food prices.

N.Sukumar
Research Analyst
www.kences1.blogspot.com