Indian Banks ordered to keep more reserves.

The Reserve Bank of India has raised the cash reserve ratio to 8.25 after the central bank had decided to keep interest rates static.

This is the second time in two weeks that the central bank has increased the amount of cash that the banks must hold in reserve in order to control inflation.

It was indeed an unexpected move especially as India is Asia’s third largest economy.

The aim of the measure is to reduce cash available for loans and try to check inflation which is currently at 7.33 percent.

Inflation is running at a three year high and has doubled from just four months ago and is well above the ceiling of 5 percent put by the central bank.

The governor of the reserve bank, Yaga Venugopal Reddy, said the reserve bank will have to introduce further measures in order to curb inflation as well as helping to keep the economy growing at a healthy 8 percent.

The government does fear a potential backlash by voters as elections are due later on in the year.

The inter bank lending rate has been kept unchanged at the six-year high of 7.75 percent.

It is hoped that it will remove over two billion dollars from the banking system, in order to control rising prices and a situation that Prime Minister Manmohan Singh has called an ‘immediate challenge’ to the country.

Story link: Indian Banks ordered to keep more reserves.