RBI hikes CRR by 50 basis pts

INFLATION CONCERNS TRIGGER MULTI-FRONT RESPONSE

The apex bank move will suck out liquidity to the tune of Rs 14,000 crore from the system.

Banks are set to go in for another round of across-the-board interest rate hikes, with the Reserve Bank of India today increasing the cash reserve ratio (CRR) by 50 basis points to 6 per cent in two stages.

The first hike of 25 basis points will be effective from February 17 and the second from March 3.

The RBI's "swift" move is aimed at checking liquidity from fanning the flames of inflation and comes less than a fortnight after the central bank raised its overnight lending (repo) rate on January 31.

Public sector banks, which had decided to hold interest rates on already disbursed home loans on a suggestion by Finance Minister P Chidambaram, will now be compelled to raise interest rates on both consumer and corporate loans.

The CRR increase will drain Rs 14,000 crore of liquidity from the banking system, on top of Rs 13,500 crore drained in the last week of December and the first week of January.

"Interest rates will harden. We will take a call tomorrow. The CRR hike will have some impact on lending rates across the board," PNB Executive Director K Raghuraman told Business Standard.

M V Nair, chairman of Union Bank of India, said, "The money supply has been running high at above 20 per cent for a long time plus inflation has remained over 6 per cent. Interest rates (both deposit and lending) are certainly going up further as banks bear another dent in their profitability within a short span," he added.

State Bank of India's Chief Financial Officer A Shandilya said the CRR hike would increase the cost of funds and also adversely affect profitability. This could make banks raise lending rates, he said.

V Vaidyanathan, executive director at ICICI Bank, the country's largest retail lender, said another increase in interest rates would lead to a greater dampening of demand for credit.

The RBI said, "In view of the paramount need to contain inflation expectations and in light of current liquidity conditions, it has been decided to increase the CRR."

The RBI had last hiked CRR by 50 basis points effective December 23, 2006, and January 6, 2007. It has hiked its overnight lending rate by 100 basis points and overnight borrowing (reverse repo) rate by 50 basis points since April 2006.

The monetary tightening comes in the wake of the banking system getting comfortable with liquidity on continued foreign fund inflows, which were reflected in call rates softening and banks not tapping the central bank's repo window for liquidity support over the last few days.

The central bank was concerned at the developments since its monetary policy review on January 31. GDP has since been estimated to grow at a higher 9.2 per cent in 2006-07, against 9 per cent in 2005-06.

WHAT LED TO THE HIKE

On Feb 7, advance estimates placed real GDP growth for 2006-07 at 9.2%, on top of 9% in 2005-06

Industrial production increased by 10.8% in Apr-Dec 2006, against 8% a year ago

Inflation based on WPI rose to 6.6% on Jan 27 from 6% on Jan 13

Non-food bank credit grew 30.2% year-on-year up to Feb 2, against 33.2% a year ago

Deposits up 23.2% year-on-year to February 2, over and above 17.5% a year ago

RBI had to absorb liquidity from February 8 after lending persistently from January 8-February 7.

Call money rate declined to 6.59% on February 13 from 7.72-8.35% during January 8-February 7