Mumbai: January 29, 2010 - The third quarter review of monetary policy 2009-10 by the Reserve Bank of India (RBI) surprises for four reasons. One, it raises the cash reserve ratio (CRR), the quantum of their deposits and borrowings that banks must keep with the RBI, by 75, rather than 50, basis points as widely expected by the market.

Two, it hikes the growth projection for the current fiscal from a fairly conservative 6.0% to an unabashedly optimistic 7.5%. Three, it raises the inflation estimate for March 2010 from already worrisome 6.5%.to an unconscionably high 8.5% (and without any apology). And four, it is remarkably (mercifully?) brief, without the obligatory paragraphs on the nitty-gritty of financial market products/regulation/credit delivery etc.

Needless to say, the stock market promptly fell, spooked more by the higher-than-expected hike in CRR than boosted by the Bank’s healthy growth projection. And though it did recover by the day’s end – the BSE sensex was up 51.09 points from the day’s low, its initial reaction was, perhaps, not entirely irrational.

After all, the CRR hike is for real, while the growth number is only an estimate. And by the look of things, a rather optimistic one. The economy grew only 7% in the first half and the RBI expects third quarter growth to come in lower than the 7.9% recorded in the second quarter.  More