It may be recalled that in the Third Quarter Review of the Annual Statement of the Monetary Policy for the year 2007-08, the stance of monetary policy was set out. The review had stated that over the period ahead, liquidity management will continue to assume priority in the conduct of monetary policy. It was further stated that the liquidity conditions are being shaped by several underlying factors and their developments have implications for liquidity management going forward and warrant appropriate and timely action. The liquidity adjustment facility (LAF) had been in an injection mode persistently during the second half of March 2008. Subsequently, there was a large turnaround and, an average amount of Rs.40,088 crore was absorbed through the LAF during April 3-17, 2008 as against average daily injection of liquidity of Rs. 27,385 crore during March 17-31, 2008.
Year-on-year WPI inflation, which was 3.83 per cent on January 12, 2008, i.e., at the time of the announcement of Third Quarter Review, increased to 7.41 per cent on March 29, 2008 and remained at 7.14 per cent as on April 5, 2008 and its overall impact on inflation expectations requires to be monitored and moderated.
In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis.
On a review of current liquidity situation, it is considered desirable to increase the cash reserve ratio (CRR) of the scheduled commercial banks, regional rural banks (RRBs), scheduled state co-operative banks and scheduled primary (urban) co-operative banks by 50 basis points to 8.0 per cent in two stages, effective from specified fortnights as indicated below:
Effective date CRR on net demand and time liabilities (per cent)
(i.e., the fortnight beginning from)
April 26, 2008 7.75
May 10, 2008 8.00
As a result of the above increase in CRR on liabilities of the banking system, an amount of about Rs.18,500 crore of resources of banks would be absorbed.
Alpana Killawala
Chief General Manager
Press Release: 2007-08/1351
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