CRR Hike: Myth or Reality?

ING Vysya Bank BSE | NSE 25/05/12 Are Mutual Funds betting on ING Vysya Bank?

With a series of IPO s in the pipeline in the months to come, some of the major players like the DLF will be a huge draw for international investors who may pump in a significant amount of dollars into the Indian economy. This, in a situation when the rupee is getting stronger vis-à-vis the dollar.

 

In such a scenario, it is strongly believed that the RBI would now attempt to sterilize the capital inflows by resorting to its time-tested measure, the increase in the CRR and Repo r ates.

 

In fact, such a move is already being talked about at the moment, in the markets. But would it really happen now?

K. Ramanathan , HD- Fixed Income , ING Vysya feels that the hike is imminent, but it may not come as immediately as now.

His estimate is that despite the fact that the inflow of Rs 25000 crore on Monday, things are evenly balanced.

He expects a Rs 8,000 crore auction outflow tomorrow. In addition, he expect Rs 6,000-10,000 crore MSS auction (Market Stabilisation Scheme) to be announced by the RBI tomorrow, that is, on Friday. The outflow of this will happen next Wednesday. As a result of these aggregated numbers, the negative liquidity situation today; the Rs 20,000 crore will be easily sucked out, he feels.

But seeing into the future, he predicts, "I see a 50 basis points hike in CRR in the next couple of months by RBI. The main reason being the DLF IPO and ICICI ADS , which will bring in huge dollar inflows and that needs to be sterilized. That's one of the reasons why RBI could look at hiking CRR In the next couple of months."

 

A similar view is echoed by Shailendra Bhandari , MD, Centurion Bank of Punjab .

 

"It would surprise me because I think it (the rate hike) would be premature. It might happen over the next few months but over the next few days or weeks would surprise me", he said.

 

SS Tarapore, Economist and former Deputy RBI Governor, speaking in an interview to CNBC-TV18 had said last week, "I believe that the future course of the monetary policy in the next six months will be determined largely by the extent of capital flows. Now if the capital flows continue as they have done in the previous few months, one or possibly two rounds of monetary tightening are unavoidable."

Tarapore explains through an example. "Assume that you get capital flows of about 70,000-80,000 crore over a six month period. The RBI would probably hold monetary growth within the range projected and you need to sterilize about 60,000 crore over the CRR and market stabilization scheme. When you do this, interest rates will go up. Now it's a mood point. The market stabilization and CRR are much stronger instruments and they will result in increase in interest rates."

Chetan Ahya of Morgan Stanley feels that we may see more than one rate hike if the liquidity surges, since the RBI's broader message is to continue monetary tightening.

 

With such an agreement of opinion, all eyes will be focused on the RBI's moves in the next few days.