The Reserve Bank of India carried forward the government's war on inflation by raising the cash reserve ratio (percentage of deposits banks have to keep with the RBI) by 50 basis points to 8% to suck out Rs 18,500 crore from the system. The move, that will put upward pressure on lending rates, comes as a blow to consumers who have borrowed money from banks recent years.

RBI governor Y V Reddy chose to strike now instead of waiting 12 days when he was scheduled to present his annual review of the monetary policy. With the wholesale price index-based inflation rate hovering over what he called "unacceptable" levels of 7%, the Govemor showed urgency in wielding his monetary stick to tame prices. Earlier, the Govemment had taken several fiscal measures like import duty cuts on edible oils and foodgrains to reininprices.

"Any CRR hike will put upward pressure on interest rates," said Prakash Subramanian, Managing Director (capital markets), Standard Chartered Bank. Besides this, the hike will also hit bank profits marginally since they will have to keep more money with the central bank at lower than market rates of interest. If any rate hike is announced by banks, customers who have opted for floating rate home loans will find the EMIs (equated monthly installments) rising. Home loan rates have gone up by over 40% to 10.25-10.75% in the last two years, hitting home buyers hard.

The year-on-year WPI inflation, which was 3.83% on January 12, 2008 at the time of the announcement of the third quarter review increased to 7.41% on March 29 and remained at 7.14% asonApril5."Its overall impacton inflation expectations requires to be monitored and moderated,"said a late-evening RBI statement announcing the CRR hike.