RBI ups repo rate, CRR
In yet another move to curb inflation, the Reserve Bank of India (RBI) on Friday announced that it was raising the repurchase rate (repo rate) by 25 basis points and would hike the Cash Reserve Ratio (CRR) by 50 basis points in two stages. The central bank has increased the repo rate, a key short-term lending rate, from 7.5% to 7.75% with immediate effect. The last time, the RBI hiked the repo rate was during its quarterly review of credit policy on Jan. 31. The RBI said that the CRR will increase from 6% at present to 6.25% from April 14 while the balance 25 basis points hike will be effective from April 28. The central bank said that the CRR hike will drain Rs155bn from banks. The RBI also announced that it was cutting interest rate on CRR balances from 1% to 0.5% from April 14. While interest rates on housing loans, personal loans, etc. will rise further, interest rates on deposits too will go up. Also, credit growth, which has been rising consistently at 30% rate could slow. Stock, bond and foreign exchange markets are expected to fall sharply on Monday following the surprise announcements by the RBI
Volatile rupee almost crosses 43 mark
The rupee was highly volatile this week. On March 28, the partially-convertible Indian currency touched its highest level in more than seven years, almost breaching the 43 mark. This was due to heavy dollar sales by banks, which faced acute cash shortage in the wake of the Rs300bn worth of outflows towards advance tax payments. The next day, the rupee had its biggest fall in 11 years on dollar buying by importers to meet month-end requirements and strong foreign capital inflows. The Indian currency closed at as against 43.58 on March 23. During the week, the rupee touched 43.0350, the highest since June 8, 1999. But on March 29 it suffered a drop of 1.7%, the biggest fall since March 18, 1996, closing at 43.76 per dollar.
Meanwhile, the Reserve Bank of India (RBI) was conspicuous by its absence from the forex market despite the rupee coming close to the 43 mark. The central bank seems quite happy to let the rupee advance as a stronger currency makes imports cheaper, helping stem the rise in inflation. In the past, the RBI absorbed dollars to keep the rupee from rising too much, maintaining the competitiveness of Indian exports. However, with price stability being the topmost priority for the Government, the central bank has given up its hands-on approach, leading to the current strength in the rupee. Faced with a stubborn inflation, the RBI has realised that it is futile to interfere in the forex market to keep exporters happy as price control is of paramount importance.