Mumbai, Aug 20: The hike in the cash reserve ratio (CRR) by 100 basis points to 11 per cent will suck out an estimated Rs 5,000 crore from the system. The one percentage point hike in the CRR will be effective from August 29.Analysts said that the latest hike will come into effect just before the banks are flush with funds on account of the Resurgent India Bond (RIB) issue. The bonds are expected to bring over Rs 8,000 crore into the system in the next fortnight.
Reserve Bank governor Bimal Jalan had, while announcing the credit policy in April, made it clear that CRR cuts would be announced "during the course of the year in the light of the evolving circumstances". "The ultimate objective is to bring down the CRR to 3 per cent in the long run to raise banks' profitability," Jalan said.
According to money market sources, the tight money policy is expected to distort the short-term yield curve for government securities. The RBI is likely to hike the yield on the 14-day and 91-day treasury bills on Friday. "There won't be much impact on the long-end securities. The medium-term securities will also realign itself," an analyst in a leading brokerage house said.
Money market sources are of the view that the hike in CRR is a temporary measure aimed at sucking out excess liquidity from the system.
According to sources, about Rs 1,000 crore is expected to flow into the system during the last week of August by way of redemption of the 364-day treasury bills and interest payment on a few securities.
"This is expected to create a deficit of about Rs 4,000 crore," said a market dealer. However, the RIB proceeds which are expected to come into the system in the last week of August will be able to balance the money supply in the system.
According to money market sources, there is no dearth of liquidity in the system at present. "Most banks are holding excess liquidity and taking advantage of the arbitrage opportunities available in the system due to currency fluctuations," said a money market dealer.
Meanwhile, money market sources are of the view that the tight liquidity in the system may hike call rates to 15 per cent by the month-end. "Banks will now have to run to cover. The call rates have already gone up to 9.5-10 per cent,",a dealer in a private bank said.
The RBI had raised the CRR by 50 basis points to 10.5 per cent on January 16 in a bid to check currency fluctuations. That was the second instance of a CRR hike in the Jalan era, the first being a 50 basis point hike on December 2, 1997. Subsequently, the CRR was cut to 10 per cent.
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