Mumbai: The Reserve Bank of India (RBI), the central bank, could stay away from raising interest rates in its third quarter monetary policy review on 29 January, but a hike in cash reserve ratio (CRR) cannot be ruled out, many bank chief executives said in response to a Mint poll conducted at Bancon, the annual banking event of the industry.
Also See Mint Poll (Graphic)
The hike in CRR, or the portion of a bank’s deposits that has to be maintained in cash with RBI, could go up by 25-50 basis points as a “symbolic” action, said a majority of the bankers polled, though that would not translate into rate hikes by banks at least in the first half of this calendar year. One basis point is one-hundredth of a percentage point.
A 50 basis points hike in CRR will suck out about Rs21,000 crore of liquidity from the system.
Banks have been parking about Rs90,000 crore of their excess funds with RBI at its reverse repo window. RBI sucks out excess liquidity from the system through its reverse repo window, offering 3.25%.
CRR is now 5%.
The previous time RBI made a change in its policy rate and CRR was in April.
In its last policy in October, RBI kept the policy rate and CRR unchanged, but withdrew the special refinance facilities it had opened for a few sectors, including mutual funds that were hurt by the liquidity crunch in the aftermath of the fall of US investment bank Lehman Brothers Holdings Inc.
The bankers do not expect RBI to hike rates even as inflation continues to rise.
India’s food price index rose 18.22% in the year to 26 December. Although it is lower than the annual rise of 19.83% in the previous week, it poses serious risk for the economy. The wholesale price-based inflation index is at 4.78% for November and analysts expect it be around 7% in December.
According to the bank CEOs, the rise in inflation is a problem of supply and not because of a rise in domestic demand. A rate hike at this point is not warranted to curb inflation, they said.
“Rates are to be kept stable this time,” said State Bank of India chairman O.P. Bhatt.
Mint spoke to chiefs of 12 banks, public and private, including Bank of Baroda, Canara Bank, Indian Bank, Oriental Bank of Commerce, Andhra Bank, Indian Overseas Bank, Vijaya Bank, Corporation Bank, Yes Bank Ltd and Federal Bank Ltd.