The Reserve Bank of India increased mandatory cash reserve of banks held by it by 75 basis points in a bid to suck excess liquidity to combat rising inflation.

However, short-term lending and borrowing rates between RBI and banks were kept unchanged, leading to speculation that banks' commercial lending rates may not change.
The apex bank also upped its economic growth projection to 7.5 per cent from its earlier estimate of 6 per cent for the current fiscal.

The 75-basis point increase in cash reserve ratio to 5.75 per cent is expected to suck out at least Rs 36,000 crore from the system. The move is to check food inflation spreading to other sectors.

According to RBI estimate, inflation is likely to touch 8.5 per cent by this fiscal-end from over 7 per cent in December. Earlier in October, the apex had projected the rate of price rise to be at 6.5 per cent by March-end.

Central Bank of India Executive Director Arun Kaul said CRR hike is more than market expectation, definitely liquidity would go down and may have some impact on interest rate.
Immediately after the announcement of credit policy, the benchmark Sensex on the Bombay Stock Exchange nosedived by 300 points but recovered from day's low level. The key index is trading down by over 190 points at intra-day.

Reactions to CRR hike

Cash reserve ratio raised by 75 basis points in two stages to 5.75 percent. First phase of 50 bps effective Feb 13, second phase effective Feb 27

Repo rate held steady at 4.75 percent, reverse repo steady at 3.25 percent

Baseline projection for GDP growth in 2009/10 raised to 7.5 percent from its earlier projection of 6.0 percent.

Baseline projection for WPI inflation for end March 2010 raised to 8.5 percent from earlier projection of 6.5 percent

Forecasts had centred on rise of up to 50 bps in CRR and steady rates.

REACTIONS:

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI: "CRR hike of 75 basis points was more aggressive than what market was expecting. With growth projection revised upwards to 7.5 percent for FY10 and inflation also revised upwards to 8.5 percent by March end, clearly focus has shifted towards inflation management, which clearly indicates as far as policy rate hikes are concerned, we should see them sooner than later.

"We expect a 25 basis point hike in repo and reverse repo rate each on or before the annual April policy meeting."

DEVEN CHOKSEY, CHIEF EXECUTIVE OFFICER, K R CHOKSEY SHARES & SECURITIES, MUMBAI: "The CRR rate hike is more than market expected, but I would not be too worried because the RBI is concerned about holding inflation, and it's good that they are not taking their eyes off reality. At the same time, they are keeping enough leverage in the system to take care of growth requirements of the economy.

I don't see any immediate interest rate hike, so sensitive sectors like auto and realty should not be under pressure, but one should remain cautious."

RAJEEV MALIK, ECONOMIST, MACQUARIE CAPITAL, SINGAPORE: "The CRR is slightly bigger... but I think certainly in the context of a sizeable

upgrade as far as the GDP growth expectation is concerned. Overall, still a very much handle-with-care exit."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI FINANCIAL SERVICES, MUMBAI: "Liquidity is traditionally tight in February and March, and with the government's divestment plans and this steeper-than-expected tightening, short-term liquidity will be significantly tighter."

"Banks do not earn any interest on the CRR and given the state of credit offtake, it will be very difficult for banks to pass on these costs to clients. So most of the heat from this tightening will be taken by banks."

"Inflation will get close to 9 percent by end-March and will soften from there. And unless WPI inflation touches double digits, I think the liquidity-mopping measures are done with for this fiscal year."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI: "There is some surprise in the extent of the hike in the cash reserve ratio, but rates remaining unchanged is in line with market expectations. The 75-basis-point hike in CRR is the first step in the tightening cycle."

"Going forward, we expect an inter-policy hike in the reverse repo and a hike in the repo rate in the April policy."

GAURAV KAPUR, SENIOR ECONOMIST, ABN AMRO BANK, MUMBAI: "The policy announcement of a 75 basis points CRR hike is largely in line with expectations. The surprise element is in the upgrading of the real GDP forecast for FY10 to 7.5 percent from 6 percent. That, along with an increase in the WPI inflation forecast to 8.5 percent for end March 2010, suggests that the RBI might not wait until the next monetary policy in April to raise policy rates. An inter-meeting rate hike looks imminent now."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI: "This is along expected lines, but slightly more aggressive than thought of. We had expected that they would do something to control to the liquidity overhang which has potential to fuel inflation in the coming months, but I still feel this may not be very effective in controlling inflationary expectations as supply shocks have been quite severe and the demand-pull pressures are still on the weaker side in the inflation process. The next policy action would be at the annual policy, and that will be conditional upon the actual credit pick-up in the fourth quarter."

KEKI MISTRY, VICE CHAIRMAN & MANAGING DIRECTOR, HOUSING DEVELOPMENT FINANCE CORP: "Actual interest rates, in terms of banks hiking rates, I personally don't see that happening immediately.

"I think banks will start exercising a little more caution keeping in mind the fact that RBI is so concerned about inflation and therefore will start acting. But I don't see them immediately hiking the rates because they are sitting on a lot of liquidity."

SONAL PATEL, CHIEF OPERATING OFFICER, PATEL ENGG: "RBI has increased CRR by 75bps as against market expectation of 50 bps. It has clearly indicated its intention to control inflation. We do not foresee the interest rates to go up in near future because of the expected inflows in the country and the comfortable existing liquidity prevailing in the market.

H.M.BANGUR, MANAGING DIRECTOR, SHREE CEMENT LTD: "The inflation is a huge worry and the economy has also picked up and the artificial stimulus was not expected to continue for long. So gradually tapering off and bringing back the economy to normal was expected. In the near term the industry demand should be coming down a little, but in the long term things should be better."

RAVI RAMU, DIRECTOR-FINANCE, PURAVANKARA PROJECTS: "CRR (hike) will only reduce the liquidity, I don't think is going to impact very much, it may help (contain) inflation. Right now the demand is for credit to be increased, they are saying the credit may be reduced. That may not be very welcome news for the industry. It is disappointing to the small home lenders."

AMIT SARIN, CHIEF EXECUTIVE, ANANT RAJ INDUSTRIES: "Home loans will get expensive, but not too much, reasonably. But if you look at the fall in property rates, it's been phenomenal. So, in the long run, the price of the finished product will not go up. It should not affect demand."

ANIL SUREKHA, EXECUTIVE DIRECTOR-FINANCE, ISPAT IND: "In furure, if the RBI decides to increase CRR rates further then there can be an impact. I think the government should do something for farm products. Inflation is not coming from the manufacturing side, it is coming from agriculture. RBI has also said in this current year they don't see a growth in farm products. It is an alarming trend so unless we improve productivity of agri-products it is going to be a problem."

SULAJJA MOTWANI, MANAGING DIRECTOR, KINETIC MOTOR: "The two-wheeler industry has been showing good growth pattern both in urban and rural markets. The fact that interest rates have not been increased will continue to spur demand. There was a lot of anxiety on whether the government will pull back the various stimulus measures. I think the fact that interest rates have not been changed will now put the entire industry at ease. The fact that the GDP forecast has been raised will mean the world will be looking at India more so now than ever before."

ARVIND PARAKH, DIRECTOR, JINDAL STAINLESS LTD: "I think it's just status quo that is being maintained by the central bank. There is a lot of liquidity in the system so we don't see interest rates going up. It won't do anything to demand either. It's a very challenging task for the RBI to manage inflation and growth so this is the best that they oculd have done. I think RBI will have to monitor exchange rates."

V. KUMARASWAMY, CHIEF FINANCIAL OFFICER, JK PAPER: "As of today the banks are flush with funds and in the last few months there has not been too much of credit offtake. It is not likely (that rates will go up)."

H.S. BHARANA, CHAIRMAN, ERA INFRA ENGINEERING: "I don't think there will be any impact. There is a lot of liquidity in the market. It is not going to affect lending rates."

RAJEEV TALWAR, GROUP EXECUTIVE DIRECTOR, DLF LTD: "There will be no significant impact of CRR hike on the real estate sector. Banks will absorb its impact."

VENUGOPAL DHOOT, CHAIRMAN AND MD, VIDEOCON IND: "The consumer goods industry will welcome this as interest rates have not gone up. There is ample liquidity available in the system, even after the CRR hike. The rural market is growing and rural population has access to the banks. Since interest rates have not gone up and GDP projection has increased demand will continue to grow."