RBI raises CRR, repo rate by 50 bps to rein in inflation

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Mumbai, Jun 24: In one of the steepest measures in recent times, the Reserve Bank of India (RBI) on Tuesday launched a frontal attack on inflation by announcing the twin moves of hiking the cash reserve ratio (CRR)— the cash banks must keep with the central bank —and the repo rate, the rate at which banks borrow short-term funds from RBI —by 50 basis points each.

The moves are expected to trigger an across-the-board hike of about 50 basis points in interest rates, with home loan rates also set to go up. The CRR hike will suck out around Rs 17,000-18,000 crore from the system. The stock and bond markets are expected to react sharply when they resume trading Wednesday morning. Yields on 10-year paper are expected to shoot up from 8.56% to around 9%.

In a late evening statement, RBI said CRR was being increased by 50 basis points to 8.75% in two stages. The CRR would be hiked to 8.5% with effect from the fortnight beginning July 5, 2008, while it would be further raised to 8.75% from the fortnight beginning July 19, 2008. Further, the repo rate has been hiked to 8.5% with immediate effect, the central bank said. Inflation had touched a 13-year high of 11.05% when government released figures last Friday, prompting serious confabulations between the government and the central bank on how best to tackle the price situation and temper inflationary expectations.

Immediately after the hike, bankers said they would soon take a call on the quantum of rate hikes to be implemented. Leading mortgage lender Housing Development Finance Corp said the twin measures were bound to push up rates. “Home loan rates may rise by 50 basis points,” Keki Mistry, HDFC MD said.

“Liquidity will be choked as more money from the bank will be mopped up by the RBI due to the CRR hike, that too, without any interest. Our borrowing cost will go up; hence we will take a call on our lending and deposit rates,” said Allan CA Pereira, CMD with Bank of Maharashtra.

“We will also have to check our margins before deciding the rates. Our ALCO meeting is scheduled next Monday to review the rates,” he added. Punjab National Bank’s ALCO meets this week. The executive committee of the State Bank of India, the country’s largest lender, meets in New Delhi on Wednesday.