India's central bank moved on Tuesday to drain surplus cash from the banking system stemming from strong capital inflows, knocking bonds lower, but it left its key interest rates steady, as expected.
The Reserve Bank of India (RBI), still sounding a fairly hawkish note after five rate increases since June last year, raised the proportion of cash banks have to keep with it on deposit to mop up funds that could fuel inflation.
The central bank raised banks' cash reserve ratio (CRR) to 7.0 percent from 6.50 percent with effect from August 4, the fourth increase since early December, taking it to its highest level since November 2001.
"Monetary expansion has to be curbed," said Saumitra Chaudhuri, economic adviser at credit rating agency ICRA. Economists said the central bank was probably not done raising the CRR, with six out of 10 polled by Reuters expecting another increase by March at the latest.
Tuesday's rise will drain nearly $4 billion from the system and the central bank also scrapped a 30 billion rupee ($740 million) limit on its daily money market operations to drain cash from the system, enabling banks to park more funds with it.