Mumbai: The Reserve Bank of India on Tuesday kept interest rates unchanged in its quarterly review of monetary and credit policy but ordered commercial banks to hold a larger share of deposits in cash.
The bank raised the Cash Reserve Ratio (CRR)—the proportion of deposits that commercial banks must hold in cash—by 0.5 percent from 6.5 percent to 7 percent.
It kept the repurchase rate—the short-term rate at which the central bank lends to commercial banks—and the reverse repurchase rate unchanged. The RBI also scrapped an existing cap on the money it can drain from the banking system.
''Recent developments in financial markets in India and potential uncertainties in global markets warrant a higher priority for managing appropriate liquidity conditions in the policy hierarchy,'' the RBI said in a statement.
The hike in CRR—the second this year—is part of RBI’s strategy to keep inflation in check.
The central bank also decided to scrap the afternoon, second session of money market operations with effect from Aug 6. The central bank normally holds such operations twice a day.
Despite the robust economic growth of 9.4 percent in the previous year, the RBI retained its earlier projection of 8.5 percent growth for the current fiscal and said the price rise will be contained below five percent.
"There are indications that a strong momentum of activity has been sustained in the Indian economy in the early months of 2007-08," RBI Governor Y V Reddy said while unveiling the policy review.
"While the growth in industry and services has accelerated in recent years, the stagnation in productivity levels of major crops and the overall volatility of agriculture output have emerged as issues of serious policy concern," he added.
"It is in this context that the Planning Commission has targeted a growth rate of four percent per annum in the agricultural sector, which is necessary not only to ensure food security but also to enable inclusive growth."
The inflation rate based on wholesale prices has been pulled down to 4.4 percent from 5.9 percent in March, but the central bank warned that pressures on the price line remained, warranting a vigilant and proactive monetary policy.
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