RBI forecasts economic growth at 8-8.5 pc

The RBI said managing liquidity would continue to receive priority in its policy objectives but warned it would act swiftly to curb any signs of “adverse developments” in inflation expectations.

The unexpected increase in the CRR, the amount of funds banks have to keep on deposit with the central bank, follows a surprise two-stage rise earlier in April to 8 per cent. The second stage of that increase has still to take effect on May 10.

The RBI kept its key lending rate steady at 7.75 per cent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6 per cent. The bank rate, which is used to price medium-term and long-term loans, remained at 6 per cent.

The decision comes as annual inflation holds above 7 per cent, its highest in more than three years, due in part to rises in international food, oil and metal prices.

A slim majority of economists polled by Reuters last week had predicted no change in rates, including the CRR, but a substantial minority had expected one or more of the key interest rates to rise.

The following are the highlights of the Annual Policy:

* CRR: To rise by 25 basis points to 8.25 per cent, effective May 24. The CRR is the per centage of banks’ deposits which they must keep as cash with the RBI.

* Repo Rate: Unchanged at 7.75 per cent. This is the rate at which the RBI adds funds to the money market.

* Reverse Repo Rate: Unchanged at 6 per cent. This is the rate at which the RBI absorbs funds from the market. It impacts Government bond yields and short-term bank deposits.

* Bank Rate: Unchanged at 6 per cent. Banks use this rate to price their long-term loans to individuals and companies.

* Growth Forecast: Expects 2008/09 growth of 8-8.5 per cent.

* Inflation Aim: “The policy endeavour would be to bring down inflation from the current high level of above 7 per cent to around 5.5 per cent in 2008-09 with a preference for bringing it as close to 5 per cent as soon as possible, recognising the evolving complexities in globally transmitted inflation.”

* Money Supply: Aims for 16.5-17 per cent money supply growth in 2008/09.

* Credit Growth: Seen at around 20 per cent in 2008/09.