India raises reserve ratio to fight ‘surging’ 6.58% inflation

NEW DELHI, Feb 13, 2007 (AFP) – India’s central bank tightened monetary policy on Tuesday for a second time in two weeks to fight surging inflation, announcing a 50-basis-point hike in the cash-reserve ratio requirement for commercial banks. The central bank has been using a variety of tools to fight inflation since it began a tightening cycle in late 2004. The Reserve Bank of India said it was increasing the cash reserve ratio (CRR) to 6.0 percent from 5.5 percent in two 25-basis-point steps in a move aimed at taking cash out of the banking system and slowing rapid credit growth.

“In view of the paramount need to contain inflation expectations and in the light of current liquidity conditions, it has been decided to increase the cash reserve ratio…,” the bank said in a statement on its web site.

Such a move had been forecast by economists after India’s inflation hit a more than two-year high of 6.58 percent last Friday.

On January 31, the Reserve Bank raised its key short-term borrowing rate by a quarter percentage point to 7.50 percent, citing inflation risks.

India’s cash reserve ratio, which was last raised by 50 basis points in December, is the percentage of commercial bank deposits kept in cash with the