CRR caught in RBI crosshairs again

Written by Banking Bureau | Mumbai, Apr 29 | Updated: Apr 30 2008, 06:34am hrs
The Reserve Bank of India (RBI) on Tuesday made it clear that its priority would be to rein in inflation. The central bank did this by hiking the cash reserve ratio (CRR)the funds banks have to keep with RBIby another 25 basis points, to 8.25%, sucking out around Rs 9,000 crore from the system.

While this may not immediately prod banks to hike lending or deposit rates, banks may review their liquidity positions later and hike rates, if necessary.

In the Annual Policy Statement for 2008-09, RBI governor Yaga Venugopal Reddy, however, kept the other two key ratesthe repo rate (the rate at which banks borrow from RBI) and the reverse repo rate (the rate at which banks park short-term funds with RBI) unchanged at 7.75% and 6%, respectively.

RBI had, on April 17, hiked CRR by a hefty 50 bps to suck out excess liquidity and cool inflationary expectations.

The CRR hike aims to make liquidity scarce for banks. This may eventually force banks to realign their lending and deposit rates to reflect the higher cost of funds. But bankers say this may not be immediate, or across-the-board, and would be selective. Since funds parked as CRR dont earn interest, the banks earnings would be reduced to that extent.

RBI has made some concessions on home loans. It has hiked the limit of housing loans, to individuals, having a lower risk weight of 50% to Rs 30 lakh from Rs 20 lakh. This is good news for households since 75-80% of all home loans belong to the Rs 30 lakh or under segment. Interest rates on home loans will remain stable, or even head lower, reckon experts. This could spur demand for real estate.

According to Reddy: High priority has been accorded to price stability, well-anchored inflation expectations and orderly conditions in financial markets, while sustaining the growth momentum.

Inflation, Reddy said, is sought to be brought down to around 5.5% in 2008-09 with a preference for bringing it close to 5% as soon as possible. Going forward, the resolve is to condition policy and perceptions for inflation in the 4-4.5% range so that an inflation rate of around 3% becomes a medium-term objective.

That RBI does not want to upset the growth momentum also became clear when it revised its growth estimates downwards, but still retained it at a healthy 8-8.5%. This apart, the fact that repo and reverse repo rates have not been touched also signals RBIs keenness to keep growth going. In any case, banks have hardly been tapping RBI for funds through repo, and hiking that rate hardly made sense.

Explained Chanda Kochhar, joint managing director of ICICI Bank: In the immediate future, ICICI Bank is not going to change its deposit or lending rates, although, due to the CRR hike in the last two weeks, we will have to park around Rs 2,000 crore as CRR with RBI. Its too premature to conclude at the moment that cost of funds is expected to rise for the bank. However, we will take a final call on our lending rates over a period of time after thoroughly studying the cost of funds.

Punjab National Bank chairman KC Chakrabarty said his bank too may not hike rates just yet and will look at strategies to counter the impact of the CRR hike on the banks profitability. Said he: We are not going to alter our lending or deposit rates for the time being due to the latest CRR hike, although around Rs 1,200 crore worth funds would be flushed out of PNB, after the two successive CRR hikes. Our deposit base at present is around Rs 1,66,000 crore. I presume, our overall profitability may thus take a hit by around 15-20 basis points due to a squeeze in net interest margins. We plan to minimise the anticipated hit on our profitability by implementing various lending strategies in the current fiscal.

RBI said broad money (M3) expansion will be sought to be moderated in the range of 16.5-17% during FY09. Though credit growth has moderated to around 22.3% in the last fiscal from 28.5% a year ago, RBI has projected adjusted non-food credit to grow by around 20% in FY08, indicating it wants to moderate credit growth further.