RBI hikes CRR by 0.5% in two stages

Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

The Reserve Bank of India, or RBI, has hiked cash reserve ratio, or CRR, by 50 bps, or 0.5%, in two stages, reports CNBC-TV18. The banking regulator will hike the cash reserve ration, or CRR to 5.75% from February 17, and to 6% from March 3.

The RBI move is expected to suck out Rs 14,000 crore of excess liquidity from the system. It may mentioned that as per latest figures, inflation had spiralled to 6.58% and the Finance Minister P Chidambaram had expressed concern over the rising priceline, while maintaining that the government was determined to tackle it.

Justifying the hike, RBI said it had given clear indication in the third quarter review of the Credit Policy on January 31 that it will use "all policy instruments including the CRR to ensure appropriate modulation of liquidity in responding to the evolving situation."

In view of the "paramount need to contain inflation expectations" and in the light of current liquidity conditions, it has been decided to increase the CRR in two stages, which would apply to all commercial banks including RRBs as well as scheduled cooperative banks.

Just ahead of the announcement, RBI Deputy Governor Rakesh Mohan said while wholesale price-based inflation was hovering at over 6%, consumer prices could be even higher at 7-8%.

The SBI Managing Director said that loan and deposit rates will rise on CRR hike. He stated that the CRR hike will result in a fall in the banks' profitability. Further, the call rate will rise on CRR hike, stated the SBI chief. The biggest public sector bank's chief said that they are to review rates shortly.

Yes Bank's Chief Economist said that the RBI's CRR hike is along expected lines. Punjab National Bank, or PNB treasurer stated that they expected RBI to take steps to control liquidity. However, the largest private sector bank, ICICI refused to comment on CRR, but sources don't rule out rate hikes. They observed that the 10-yr bond yield was seen up by over 8%.

HSBC's India Treasurer said that the CRR hike is very negative for the bond market. Credit flow to housing loan sector may fall further by March, said the SBI chief, who added that they are to convene an Asset Liability Committee meet soon.

There will be upward pressure on interest rates said IDBI Bank authorities, who said that they are to review rates shortly. The Bank of Baroda Chairman stated that that they are likely to raise prime lending rates, or PLR, soon. They feel that the loan growth is likely to fall due to the rate hikes. They observe that the deposit rates are already high and lending rates are to rise.

PNB, BOI and Union Bank observed that there will be upward pressure on interest rates.

-With inputs from PTI.