The Reserve Bank of India (RBI) on Thursday announced a hike in banks? cash reserve ratio (CRR) by 50 basis points to 8%.
The hike would be effected in two phases of 25 basis points each, the first being in the fortnight beginning April 26 and the second on May 10.
The CRR hike is expected to suck out Rs 18,500 crore from the system.
The hike in the CRR is meant to mop-up additional liquidity from the banks. CRR is the cash that banks maintain with the RBI as a percentage of their net deposits. RBI feels that the additional liquidity was driving inflation to a 40-month high.
The year-on-year wholesale price index inflation, which was at 3.83% on January 12 this year when RBI announced its third quarter policy review, increased to 7.41% on March 29 and dipped marginally to 7.14% as on April 5, 2008.
?The overall impact on inflation expectations requires to be monitored and moderated,? RBI said in a late evening statement about the new CRR rate.
Bankers have been expecting a CRR hike in view of the inflationary pressures on the interest rates. After the RBI announcement, bankers said they do not expect any significant announcements by the central bank on April 29. RBI is to unveil its Annual Monetary Policy for 2008-09 on that date.
Bankers, however, do expect interest rates to spurt by 50 basis points in the short term of up to six months or so.
Said Bank of India chairman TS Narayansami: ?We will not alter our current PLR, deposit rates or home loan rates. This CRR hike was highly anticipated. I do not think RBI will now take any significant steps in the forthcoming monetary policy. It?s too early to comment on our bank?s profitability, post-this hike.?
Canara Bank chairman MBN Rao said: ?Due to this hike, we will not change our current PLR or deposit rates. We?ll review our home loan rates after the forthcoming monetary policy, but are certainly not going to increase them. The hike will not impact much the profitability of our bank.?
MD Mallya, chairman and managing director, Bank of Maharashtra, said: ?We need to analyse the impact of the CRR hike. Also, we?ll wait until the policy announcement by RBI before taking any decision. I personally believe that there is a possibility of a hike in reverse repo as well as repo rates by 25 basis points in the policy. Yes, the CRR hike could put some pressure on the margins of my bank, but still, I think that could be moderated by the overall management of assets and liabilities.?