Reserve Bank of India drains out money, Financial Markets guards food

There are short term relief, possibility of medium term pain and two big questions in RBI's keenly anticipated monetary policy review which was marked by a 0.25 percentage point hike in the cash reserve ratio (CRR) to 8.25%.

CRR determines the amount of money banks have to keep in deposit with RBI and higher CRR means less funds for banks to lend. RBI is arguing there's too much cash sloshing around in the system fuelling inflationary expectations. Inflation as measured by the wholesale price index has been 7% plus in recent weeks, a three year high.

CRR was increased earlier this month and has climbed from 7.5 to 8.25% in a few weeks. The CRR hikes will take around Rs 27,000 crore out of the banking system, forcing banks to rethink lending strategies but it needn't immediately make them raise rates, including those on home loans. That's the short term relief

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Inflation at 3-year high of 7%, growth fears spread

India's key inflation rate surged to a three year high of 7 per cent, as prices of primary articles continued to rise. According to data released by the Ministry of Commerce and Industry today, the inflation rate, based on the wholesale price index, accelerated to 7 per cent in the week that ended March 22 from 6.68 per cent a week earlier.

This is the fifth straight week that the inflation rate has breached the Reserve Bank of India's stated comfort level of 5 per cent for the financial year that ended Monday. Inflation rate had last breached the 7 per cent mark in December 2004.

A rise in the price of "minerals" was a significant factor that led to the prices of all primary articles increasing by 1.8 per cent, as compared to the previous week. Primary articles - comprising food and non-food commodities as well as minerals - have the second highest weightage in the wholesale price index.

According to the inflation figures, while the index for food and non-food commodities increased by 0.1 per cent and 0.4 per cent respectively, the index for minerals increased by a whopping 38.2 per cent, largely on account of a 46 per cent increase in the prices of iron ore.

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