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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