On 29th April 2008, the RBI Governor presented the Annual Policy Statement for the current financial year 2008-09. Following are the highlights of the statement.  

• Policy Rates remain unchanged as shown below

•  Cash Reserve Ratio (CRR) hiked by 25 basis points to 8.25%. This is the second consecutive CRR hike in this month. Prior to this, on 17th April the RBI effected a 50 basis increase in CRR to 8.00%. However, that rise was to become effective in two phases (25 basis points each) namely, April 26 and May 10 respectively. The current hike will be effective from 24th May 2008 

The combined effect of these two CRR hikes will be squeezing out of funds to the tune of Rs.27,750 crores from the system. The measure is intended to contain inflation which currently is at 7.1%. 

The RBI wants to bring down the inflation rate to 5.5% in 2008-09 with a preference for bringing it close to 5.0% as soon as possible and ultimately 3.0% in the medium term.

Squeezing out of funds however, is expected to bring upward pressure on bank interest rates. This will enhance the cost of funds for industry. The progressive impact of shrinking liquidity from the system would particularly impact SMEs, since most of these companies have no recourse to ECBs or any other cheaper foreign currency borrowings. 

• When banks are subjected to higher CRR their profitability gets affected as they are not compensated. Consequently banks are often forced to increase the lending rates in order to protect their margins.
   
• The policy attaches high priority to price stability and inflation control while sustaining the current growth momentum. However, these would come at a price which is slowing demand. Although, the RBI concedes that “ the pick-up in inflation during the 4th quarter of 2007-08 has mainly emanated from supply side pressures….”, it continues to progressively drain liquidity from the system which would invariably impact demand through hardening of interest rates particularly, in the EMI related sectors.
• The Central Bank expects the economy to grow by 8% to 8.5% during the current financial year.
• The RBI recognizes the dire need to respond swiftly to any adverse international and domestic developments using both conventional and unconventional measures.
• Other targets for 2008-09:

Broad Money (M3) expansion to be contained within the range of 16.5 to 17.0% 

Aggregate deposits to increase by 17.0% or Rs.550,000 crores 

Adjusted non-food projected to increase by about 20.0%· 

• Domestic crude oil refining companies would be permitted to hedge their commodity price risk on overseas exchanges/markets on domestic purchase of crude oil and sale of petroleum products based on underlying contract.
• The limit of bank loans to individuals for housing having lower risk rate of 50% enhanced from Rs.20 lakhs to Rs.30 lakhs.
• Regulations in respect of capital adequacy, liquidity and disclosure norms for systemically important Non-Banking Finance Corporations to be reviewed.