The Reserve Bank on Friday raised by 75 basis points the cash reserve ratio - the amount lenders need to keep with the central bank - to suck Rs 36,000 crore out of the system and cool down the surging inflation.

The RBI's move to absorb a large amount of liquidity is expected to have a bearing on interest rates, although bankers ruled out an immediate hike in lending rates as there is excess liquidity in the system.

The apex bank in its third quarter monetary policy review, however, refrained from raising short-term borrowing and lending rates (repo and reverse repo), primarily to encourage growth which is "is yet to fully take hold".

Encouraged by 7.9 per cent growth in the second quarter (July-September 2009), the RBI raised the economic growth forecast for the current fiscal to 7.5 per cent, up from 6 per cent projected in October.

Promising to take more action to tackle the price rise, the RBI said inflation is likely to firm up to 8.5 per cent by March-end from 7.3 per cent in December. The Reserve Bank had earlier projected the inflation to be around 6.5 per cent by fiscal-end.

"Reduction in excess liquidity will help anchor inflationary expectations. The recovery process will be supported without compromising price stability," RBI Governor D Subbarao said in his policy statement.

The increase in cash reserve ratio (CRR) comes in two tranches. The first hike of 50 basis points to 5.5 per cent will in the fortnight beginning February 13. The second raise of 25 basis points is in the fortnight beginning February 27.

The reverse repo and repo rates are unchanged at 3.25 per cent and 4.75 per cent, respectively.

The hike in CRR is also seen as exit from the accommodative policy it unleashed after sources of funds dried up due to deepening of the global financial crisis. This is the second time RBI is announcing an exit measure.

Domestic inflation

In its previous review in October, RBI raised the statutory liquidity ratio - the portion of deposits that banks keep in cash, gold and government securities - by one percentage points to 25 per cent. It also discontinued with temporary liquidity measures to meet cash requirements of mutual funds.

Along with its exit from monetary stimulus, the Reserve Bank also wanted the government to spell out the broad contours of tax policies and cut in expenditure to bridge fiscal deficit.

Subbarao said expectations of softening domestic inflation are contingent on food prices moderating.

Food inflation rose to 17.40 per cent in the week ended January 16.

"This, in turn, depends significantly on the performance of the south-west monsoon in 2010. If rainfall is inadequate, high food prices will continue to intensify inflationary pressures," he added.

As RBI expects growth to reach 7.5 per cent this fiscal, against 6.7 per cent a year ago, Subbarao said if excess liquidity is allowed to persist and growth accelerates, it may exacerbate inflation expectations.

With the fiscal deficit projected to widen to 6.8 per cent this fiscal with the government cutting taxes and raising Plan expenditure, the RBI advised the Government to return to the path of fiscal consolidation.

"For both short-term economic management and medium-term fiscal sustainability reasons, it is imperative, therefore that the government returns to a path of fiscal consolidation," RBI said.

It also advised the government to announce phased roll-back of stimulus measures which are transitory in nature.

"The consolidation can begin with a phased roll-back of the transitory components," the central bank said.

Even as the RBI upped the growth projections for India, it said there is still uncertainty about the pace and shape of the global recovery. There are concerns that it is too dependent on public spending and will unravel if governments withdraw their stimuli prematurely.

"As the world discovered during the recent crisis, the global economy is heavily inter-linked through the business cycle. A downturn in global sentiment will affect not only our external sector, but also our domestic economy," it added.

As the RBI moved to suck out excess liquidity, it said money supply, in fact, moderated from over 20 per cent at the beginning of the financial year to 16.5 per cent on January 15, 2010, reflecting deceleration in bank credit growth.

On oil prices, it said they remained range-bound in the recent period. However, if the global recovery turns out to be stronger than expected, oil prices may increase sharply, which will affect all commodities.