New Delhi: Interest rates are likely to move upward, with the Reserve Bank on Friday increasing the cash reserve ratio (CRR) of banks by 50 basis points as part of steps to absorb excess liquidity from the economy and contain inflation around five per cent.
The CRR, the amount of money and assets which banks must keep with RBI at any given time, will be increased to 5.25 per cent on December 23 and to 5.5 per cent on January 6, 2007 from the current 5.00 per cent, the central bank said.
The RBI decision could push housing and personal loans upward as all lenders would have to deposit a higher percentage of their assets with the apex bank. The hike would absorb about Rs 13,500 crore of resources of banks.
The increase comes just a day after Finance Minister P Chidambaram said it was premature to talk about overheating in the economy, although concerns on rising prices remained.
"The recent reduction in prices of petrol and diesel will moderate inflation, but the overall impact on inflation expectations requires to be monitored," RBI said.
The Bank said conditions in financial markets were stable and orderly. The external sector was also strong and current account deficit is likely to be close to the trend, and will continue to be accommodated by net capital flows.
"However, it is necessary to recognize the challenges emanating from capital flows and consequent impact on increasing liquidity," it added.
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