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The 50-basis-point hike in CRR by the Reserve Bank of India (RBI) after a two-year gap is not surprising given the economic conditions. With inflation edging close to the 5.5 per cent mark, money supply expanding at a higher than projected rate and certain sectors showing signs of overheating, the central bank's move appears logical. But the larger issue is whether the central bank will succeed in achieving its objective of containing inflationary pressures using this monetary tool. The hike in CRR in two phases is likely to drain about Rs 13,500 crore from the banking system. This is, however, unlikely to put pressure on overall liquidity conditions as mop-up of resources through the LAF (Liquidity Adjustment Facility) will continue. However, the measure is likely to have some impact on banks lending operations. The waiver of interest on CRR balances by the RBI in June, coupled with the recent hike in CRR to 5.5 per cent, means that banks will have to set aside a higher portion of their net demand and time liabilities without earning any return on the same. And with less funds available for lending, banks may have to re-work their lending strategies and re-align rates. This may lead banks to increase their sub-PLR lending rates or trim discounts on corporate loans.

Radhika Kamath

More Stories on : Financial Policy | RBI & Other Central Banks | The Big Deal

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