The Hindu Business Line : Cash reserve ratio hiked by 0.5 percentage point to 7%

Mumbai, July 31 In a bid to drain out the excess supply of funds and ensure price and financial stability, the Reserve Bank of India on Tuesday hiked the Cash Reserve Ratio — the proportion of the deposits banks have to keep with the RBI — by 0.5 percentage points to 7 per cent.

The CRR hike, which would come into effect from the fortnight beginning August 4, will suck out Rs 16,000 crore from the system at one go.

In the first quarter review of the monetary policy announced today, the RBI kept unchanged its key rates such as the reverse repo at 6 per cent, the repo rate at 7.75 per cent, and the bank rate at 6 per cent.

Addressing a press conference, Dr Y.V. Reddy, RBI Governor, said that keeping in view the recent developments in the financial markets in the country and the uncertainties in the global markets, “managing appropriate liquidity” assumed priority.

While non-food credit growth has decelerated, the acceleration in money supply and reserve money warrants an appropriate policy response, Dr Reddy said.

Banks cut deposit rates

In response to the policy measures, banks have started cutting deposit rates to reduce their cost of funds. Public sector banks such as Bank of India and Bank of Baroda have announced 50 basis points reduction in the one-year deposit rates. Normally, a CRR hike is followed by an increase in lending rates. However, this time due to excess liquidity, banks are unlikely to hike lending rates, said a banking sector analyst.

LAF cap removed

The RBI has also allowed banks to keep more funds with it under the daily liquidity adjustment facility by removing the Rs 3,000-crore cap imposed in March this year.

However, the interest paid by the RBI on such short-term funds can henceforth be either at fixed rate or at variable rates. In other words, the RBI will undertake short-term lending and borrowing through repo and reverse repo at a rate of interest which its thinks appropriate.

The removal of the Rs 3,000-crore LAF limit is expected to push up overnight call rates which have been ruling at below 1 per cent.

The RBI, which holds money market operations twice in a day, said the second auction held in the afternoon will be cancelled with effect from August 6.

Today’s hike in CRR is the third in the current year; the earlier two were in February and in April. While on the earlier occasions, the focus was to moderate credit expansion and inflationary expectations, the priority now is to “maintain appropriate liquidity.”

Inflation

The central bank has reiterated its objective of holding inflation within 5 per cent during the current year, and to bring it down to 4-4.5 per cent in the medium term.

“In some senses, I would concede that inflation is out of the newspaper headlines. But is it out of the minds of the people?” Dr Reddy asked.“We believe that there is still a fear of high inflation among the minds of the people. That is an important factor that has to be assessed in terms of inflationary expectations.”

The growth of non-food credit is expected to decelerate by 24-25 per cent in the current year, against an average growth of 29.8 per cent in the last three years.

The RBI has also reiterated its projection of GDP growth at 8.5 per cent.

More Stories on : Credit Policy | CRR & Bank Rates

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