The Hindu Business Line : Cash reserve ratio hiked by 50 basis points

“There will definitely be an upward pressure on interest rates. We have to take a call on what the impact of this CRR hike would be on our funding cost as well as deposit rates.”

Our Bureau

Mumbai, April 17 Ending days of speculation, the Reserve Bank of India on Thursday hiked the cash reserve ratio by 50 basis points or 0.5 percentage point to eight per cent, as a measure to contain inflation which has been ruling above seven per cent in the past few weeks.

Cash reserve ratio or CRR is the portion of deposit banks are required to keep with the RBI.

The RBI action, which was expected, could see an upward pressure on interest rates, said analysts. The hike which has come nearly a fortnight ahead of the RBI’s annual monetary policy announcement scheduled on April 29, is expected to suck out Rs 18,500 crore from the system.

The increase will be in two stages (25 basis points each); the first from April 26 and the second from May 10.

A statement issued by RBI said “in the light of the current macro economic, monetary and anticipated liquidity condition and with a view to containing inflation expectations, it is essential to take appropriate action on an urgent basis.”

The last hike in CRR was in October 2007 by 50 basis points to 7.5 per cent.

Bankers estimate that the cost of funds will now inch up by 0.4 percentage point. For the banking system, the incremental cost on an annual basis would be around Rs 1,500 crore.

Mr M.V. Nair, Chairman, Union Bank of India, said that the hike was by and large expected given that liquidity has been in abundance. “There will definitely be an upward pressure on interest rates. We have to take a call on what the impact of this CRR hike would be on our funding cost as well as deposit rates. In the medium term, if credit growth does not take off and deposit growth is higher then we could see banks cutting the interest rates on deposits,” he said.

The bank’s Asset Liability Management Committee will meet on Monday.

For Union Bank, the hike means that an additional Rs 500 crore would get tied up as part of CRR. “The move was expected and there is no need for banks to react immediately by increasing rates as enough liquidity is available”, said Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India.

“Having seen profits in treasury, banks need not hike interest rates immediately. We have to wait and watch to see if liquidity is available and to what extent it may impact banks,” he said.