India Holds Rates, Cash Reserve Ratio Up

The Reserve Bank of India Tuesday kept its short-term rates unchanged as expected but raised the amount of cash that banks must hold in an attempt to contain the surging liquidity that has pushed overnight rates to near zero.

The Cash Reserve Ratio, the share of deposits that banks must keep with the central bank, will rise 50 basis points to 7% from Saturday. It is the third CRR hike this year. The central bank also unveiled a series of measures to more closely manage liquidity through its daily reverse repo and repo auctions in its quarterly review of monetary policy. "Recent developments in financial markets in India and potential uncertainties in global markets warrant a higher priority for managing appropriate liquidity conditions," the RBI said. Bond prices fell sharply as banks, the largest buyers of sovereign bonds, will now have less cash to buy securities. The benchmark 7.49% 2017 bond fell to INR97.45 as against INR98.20 before the policy was released at 0630 GMT. The central bank left the repo rate, or its key lending rate, unchanged at 7.75% and the reverse repo, or the borrowing rate, at 6%. It also kept the bank rate steady at 6%. Latest official data showed inflation for the week ended July 14 at 4.41%, down from a two-year high of 6.7% at the end of January. Keeping inflation within 5% in the current fiscal year will be a priority, the bank said.