India tightens cash conditions to cool inflation

By Anurag Joshi

MUMBAI (Reuters) - The Reserve Bank of India (RBI) on Thursday announced a surprise 50-basis-point increase in banks' reserve requirements to cool inflation from near three-year peaks, and analysts did not rule out further steps at an upcoming policy review.

After markets had shut, the RBI said it would raise the cash reserve ratio (CRR), the amount that banks have to park with it, to 8 percent, its highest in almost 7 years.

The move follows a slew of duty cuts and export bans ordered by the government in recent weeks to ease price pressures as policymakers worry over facing voters at state and general elections due this year and next.

"I think it will work less visibly than fiscal measures and I don't think it will bring down inflation below 7 percent in a hurry," said Abheek Barua, chief economist at HDFC Bank.

"The indication is that they may be planning something more in the policy and they don't want to pack everything in one day."

The RBI's next policy review is scheduled for April 29.

The repo rate, through which the central bank lends cash to banks, has remained unchanged for the past year at 7.75 percent.

The CRR was last raised in November, and the latest increase will take effect in two phases -- the first on April 26 and second on May 10 -- and aims to absorb inflation-fuelling cash from the banking system.