Barely 12 days after raising the repo rate by 25 basis points, the RBI surprised the market by hiking banks’ cash reserve ratio.
50 bps hike in CRR will impound Rs 14,000 crore; Loan and deposit rates will rise across the board
MUMBAI: Barely 12 days after raising the repo rate by 25 basis points, the Reserve Bank of India (RBI) surprised the market by hiking banks’ cash reserve ratio (CRR) by 50 basis points from the current 5.5% to 6% (100 basis points make 1%).
The move, which will impound Rs 14,000 crore of bank funds in two stages, will force a rise in lending and deposit rates. A selloff is expected in the bond and stock markets on Wednesday.
Tuesday’s gambit, forced by last Friday’s sharp rise in the wholesale price index to 6.6%, means that the RBI is now willing to take tougher measures to curb inflation in an election year. Elections are due in the crucial state of Uttar Pradesh in April-May, which could have major repercussions for the UPA-led government at the centre.
While politicians will worry about the prices of essential commodities like pulses and vegetables, the central bank’s concerns are more macroeconomic.
With the economy set to grow by 9.2% this year on top of last year’s 9%, the central bank is concerned about overheating and asset bubbles building up. It had made a reference to both these issues in its last credit policy review on January 31.
While containing inflationary expectations is the primary objective in the short-run, the prospect of an overheated economy suffering a hard landing could be worse.
The RBI is trying for a soft landing for the economy and the latest move is yet another step in that direction.
Another concern which cannot be substantiated is the fact that US mortgage lenders are seeing increasing defaults, which may not have gone unnoticed by the RBI. Excessive growth in home loans could lead to bad debts pretty soon.
This is the second time the RBI has surprised a segment of the market after a similar two-instalment CRR hike in December. The first part of the current hike (5.5 to 5.75%) will be effective this Saturday, while the second 25 basis points hike will be effective from March 3.
This is the first time CRR will be hitting 6% after November, 2001, when it was lowered from 7.50% to 5.75%. The CRR rate is used by the central bank to soak-up excess money supply from the banking system. The hike will hurt banks most because they were already struggling to make ends meet. And when banks suffer the pinch, they are most likely to pass it on to customers.
Bankers admitted there they will have to raise both corporate and retail lending rates to tide over the latest CRR hike. Rates are likely to go up by at least 1%, especially for banks who didn’t tinker with rates after the repo hike in January.
Some bankers said the move was not as big a surprise as it had been made out to be. “It is a surprise, but not a bolt from the blue,” said Anant Krishnamurthy, co-head, treasury, HSBC Bank.
“Costs for banks will rise, loans will become expensive and the banking sector will take a hit,” he added.
“(Unlike December), this time it (the CRR hike) was expected because (overnight) call rate was trading near the reverse repo rate (indicating improvement in liquidity) after the RBI’s dollar buys in the forex market pumped in liquidity in the last couple of days,” said Mohna Shenoi, group head of treasury, Kotak Mahindra Bank.
Many bankers said they were expecting a rate hike, but closer towards the end of February or in March.
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