In the recent mid-term review of the annual policy statement, RBI has taken a bold and significant step. It has decided to increase CRR of the scheduled commercial banks, Regional Rural Banks (RRBs), scheduled state cooperative banks and scheduled primary (urban) cooperative banking system by 50 basis points of their Net Demand and Time Liabilities (NDTL) in two stages. CRR was increased by 25 basis points with effect from the fortnight beginning December 23, 2006 and a further increase of 25 basis points effective from the fortnight beginning January 6, 2007.

This move by RBI was a very significant one made at a very crucial time after taking into consideration the economic environment and having a close look at some of the specific economic indicators. The move, according to the apex bank, was not only meant to consolidate the growth story but also to look into the future. The RBI press release said, "Furthermore, containing inflation expectations in the current environment and consolidating gains achieved so far in regard to stability would warrant appropriate, immediate measures and willingness to take recourse to all possible measures in response to evolving circumstances promptly. The objective is to continue to maintain conditions of stability that contribute to sustaining the momentum of growth on an enduring basis. Towards this objective, the monetary policy stance and measures will need to be in a process of careful rebalancing and timely adjustment."

Willing to take recourse to all possible measures? Surely it was! CRR had never been hiked in the last two years. It is also against RBI's thinking to move CRR eventually to 3%. It would not be wrong to say that the market was a bit surprised by the move. The financial markets, especially the stock markets, crashed after the news came in. The crash was one of the biggest in BSE history and, perhaps, it also reiterates the role of RBI and the impact of its decision on the financial markets. (There are also others who think that the market crashed on the back of unexpected IIP figures.)

The Analyst Magazine, CRR Hike, Cash Reserve Ratio, CRR, Net Demand and Time Liabilities, NDTL, Regional Rural Banks, RRBs, Economic Environment, Cooperative Banking System, Market Stabilization Scheme, MSS, Consumer Price Index, CPI, Corporate Sector, Reserve Bank of India, RBI, Net Capital Flows, Wholesale Price Index, WPI.