CRR hike well digested by markets

 It was an unexpected CRR hike by the RBI today and an all the more unexpected rally seen in Indian markets. The rally came immediately two days after the major global sell off.

The RBI hiked the CRR by 50 bps and the stock markets immediately slipped in the red giving up all their morning gains. But showed smart recovery and ended with some hefty gains. It can be said that the markets brushed off the CRR hike concerns when it realized that CRR hike is a tool being used to suck out the excess liquidity in the system. It is not being used to send out any interest rate hardening signals.

Excess liquidity leads to inflationary pressures, hike in CRR will help mop up liquidity and reduce inflationary pressure.

The move will effectively take out approximately Rs 15000 crore from the banking system and bring no returns for the banks for that kind of money.

The policy intends to hold inflation within 5.0 per cent in 2007-08, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.

Apart from that the cues from Asia and US were positive to support the markets at the higher levels. Also by the end of the day Nifty shorts were seen being covered, which lifted the markets higher. These shorts were opened on Friday when Sensex plunged over 500 points. Record selling was in the F&O segment on Friday. Nifty discount narrowed to 20 points from 40 points, which was also a positive sign.

In the policy the removal of the reverse repo (overnight borrowing) ceiling of Rs 3,000-crore was a welcome step.

The policy has kept bank rate unchanged; reverse Repo Rate and Repo Rate under LAF kept unchanged. There was withdrawal of the ceiling of Rs. 3,000 crore on daily reverse repo under the LAF with effect from August 6, 2007.