The repo rate, the rate at which RBI lends short-term money to banks, has been increased by 25bps to 7.75% with immediate effect, along with a cash reserve ratio (CRR) hike of 25bps each in two phases (starting April 14 and April 28), taking it to 6.5% from the current 6% . The CRR hike will remove over Rs 15,000 crore from the system.
Along with these steps, the interest rate applicable on eligible CRR balances has also been halved to 0.5% beginning April 14. However, the reverse repo rate (the rate at which banks park short-term funds with RBI) has been left unchanged at 6%.
Though the latest round of measures are sure to spark a series of lending rate hikes by banks, finance minister Palaniappan Chidambaram said in Mumbai that the RBI had consulted the government on the moves, and he supported them.
With the latest hikes, the RBI has now raised short-term rates (both reverse repo and repo) six times since January 2006, and hiked the CRR three times since December to arrest lending, which has grown at an average of 30% in the past three yearsthe fastest pace since the central bank started collating data in 1971.
Cash reserve ratio for banks raised by 50 bps
Also, the RBI, in its explanation for the new stringent measures, pointed out that broad money supply (M3) growth at 22% remains higher than the 16.9% growth a year ago. Credit (non-food) growth at 29.5% is not starkly different either, from a 32.5% around the same time the previous year.
KV Kamath, managing director and CEO, ICICI Bank, said there would be a rise in the cost of funds. We will get a clearer picture by the first week of April, he said. Top public sector banks, including State Bank of India, Punjab National Bank, Canara Bank and Bank of Baroda have indicated lending rate hikes as their cost of funds would go up, forcing a slowdown in credit growth. They expected profitability to come under pressure and their net interest margins to be reduced. The CRR hike will lead to the pre-emption of funds available for lending, said MBN Rao, CMD, Canara Bank.