RBI hikes CRR by 0.75%

Speaking of central banks, the Reserve Bank of India (RBI) released its third quarter review of the Monetary Policy today. It has hiked the cash reserve ratio (CRR), the ratio at which banks maintain cash with RBI (as a percentage of their deposits) by 0.75%. It is meant to suck out liquidity to the tune of Rs 360 bn. Interesting to note that the RBI believes that its monetary measures will be of little consequence unless the government mends its ways. In our view, this watershed event marks the bottoming out of the easy liquidity scenario which unfolded since late 2008. However, the reversal of accommodative monetary stance cannot be effective unless there is also a roll back of government borrowing.