RBI hikes reserve ratio

The Reserve Bank of India on Friday raised the ratio of reserves it requires banks to hold in its coffers in a bid to temper price pressures.

The Reserve Bank raised its cash reserve ratio by 75 basis points to 5.75%. The measure is expected to drain Rs36,000 crore ($7.8 billion) from the banking system.

Both the repo and reverse repo rates remain unchanged at 4.75% and 3.25% respectively.

The bulk of analysts forecast a half-point hike after the Reserve Bank flagged the danger that high food inflation could have a broader impact on prices in its quarterly review of monetary and macroeconomic conditions released Thursday.

Duvuuri Subbarao, the governor of the Reserve Bank, said on Friday banks generally welcomed the institution's stance. Banks had indicated that they had already reduced lending rates in line with an earlier request from the banks, the governor noted.

Subbarao said the Reserve Bank expected inflation to moderate from July 2010, though he alluded to further monetary tightening, saying the moderation "will depend on several factors including the measures taken and to be taken by the Reserve Bank as part of the normalisation process."

Subbarao flagged higher-than-expected growth of 7.9% during the second quarter of the 2009 financial year and said the Reserve Bank had revised its growth forecast from 6% to 7.5%.He warned that the recovery was yet to become sufficiently broad based, though the central bank expected the country's relatively strong performance to continue during the forthcoming fiscal year.

The Sensex index of companies listed on the Mumbai stock exchange closed up 0.31% at 16,358. The Nifty index, comprising the 50 leading companies listed on the National Stock Exchange of India, closed up 0.3% at 4,882.

Click here to read the central bank's statement