RBI on Tuesday decided to continue with the high interest rate regime, despite inflation coming down to 3.1% by October 13, 2007 from over 6% in March this year, showing that the central back is not satisfied with the progress in the pricing front. In its mid-term review of credit policy, RBI left the statutory interest rates unchanged and increased the amount of cash that banks are required to keep with RBI (known as cash reserve ratio, CRR) by half a percentage points to 7.5%.

The CRR hike will suck out Rs 16,000 crore from the banking system. RBI governor YV Reddy said still enough liquidity will be left to support economic activities. Indicators like repo, reverse repo and bank rates are left unchanged.

RBI felt that the inflationary expectation is still high. This is mainly because high global prices of crude, metals, foods and commodities, which are not passed fully to consumers. Therefore, the present inflation (3.1%), based on WPI, indicates a suppressed figure, which can destabilises pricing scenario in the future.

While projecting growth at 8.5%, Reddy said it would be possible only if there is no escalation in global crude prices. However, FM Chidambaram said growth will be higher than 8.5%. RBI also expressed its concern over the liquidity created by foreign fund inflows, which can fuel inflation. Since June, RBI has added $48 billion forex in its reserve. In October so far, FIIs have invested $8 billion as against $17 billion so far in the year.