• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Our Bureau

Repo rate, cash reserve ratio raised; retail, corporate loans may turn costlier

THE RBI GOVERNOR, DR Y.V.REDDY

Mumbai March 30 In yet another attempt to ensure price stability, the Reserve Bank of India on Friday upped the repo rate by 25 basis points from 7.50 per cent to 7.75 per cent and the Cash Reserve Ratio (CRR) by 50 basis points to 6.50 per cent in two phases effective April 14 and take out Rs 15,500 crore from the system.

Also, banks will be earning less on CRR with the RBI snipping interest rate to 0.5 per cent per annum from the present one per cent effective April 14. Banks earn nothing on the minimum CRR of 3 per cent and will now get less on the extra 3.5 per cent.

The move may not hit bank balance sheets for the fiscal ended March 31, 2007, as the twin RBI announcements came after banking hours on Friday.

But the fiscal starting April 1, 2007, could see retail and corporate loans turning costly with deposit rates also going up. Market players were stumped for words as the repo rate (the cost of bank borrowings from RBI) and CRR (the percentage of deposits immobilised by RBI in cash) hikes come when rupee funds are hard to come by.

Policy shift

The RBI, in its elaborate explanation, admits to a sure policy shift to douse inflation and inflationary expectations albeit at the cost of growth. Its press release states: "The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances."

Dear money policy

Since mid-2004, the RBI has been working towards a dear money policy, "in recognition of the cumulative and lagged effects of monetary policy."

The wholesale price index (WPI) has been ruling around 6.5 per cent for the third week running up to March 17; prices of primary articles, fuel group and manufactured products showed a year-on-year rise of 12 per cent, one per cent and 6.6 per cent as on March 17 against 3.7 per cent, 8.9 per cent and 1.7 per cent a year ago, respectively. The year-on-year growth in non-food bank credit has been put at 29.5 per cent as on March 16 against 32.7 per cent a year ago.

Deposits have moved up by 24.8 per cent as on March 16 over and above 18 per cent a year ago. Forex reserves have climbed by $18.6 billion from $179.1 billion (end-January 2007) to $197.7 billion as on March 23. The Market Stabilisation Scheme, to mop up rupees arising from purchase of dollars, has mopped up additional liquidity of Rs 23,894 crore between February 1 and March 23.

The RBI takes consolation in the fact that other central banks have been doing the same to hold back prices.

Firming up of crude prices at over $60 per barrel, supply-side discontinuities in farm goods and steep loan growth have together got the RBI to do a repeat of its actions since mid-2004.

In some ways, the RBI has no alternative other than marking up the repo and CRR rates as it has little left in its policy armoury. But the RBI has no say on farm supplies and bulging forex reserves adding to rupee funds.

In buying dollars, the RBI will be enhancing rupee liquidity; if it does not intervene in the forex markets, the rupee appreciates hurting exports. The central bank is in a bind not of its making.

Related Stories:
Money multiplier falls on CRR hikes
RBI acts to rein in inflation
RBI hikes repo rate by 25 bps

More Stories on : CRR & Bank Rates | Economy | Interest Rates | RBI & Other Central Banks

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Heat wave in Gujarat seen as good augury

Copyright © 2007, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line