Mumbai: The Reserve Bank of India (RBI) will not pay any interest to banks on their cash balance kept with the central bank from 31 March.
Abolition of interest on the cash reserve will hurt banks’ profitability at a time when banks are facing the heat of rising interest rates and consequently higher depreciation in their bond portfolio.
Analysts say bank stocks will bear the brunt of this, when the market opens for trading on Monday.
The abolition of interest on banks’ cash reserve ratio (CRR) follows an amendment to the RBI Act that has been notified by the Government of India. The amendment took effect from 1 April 2007.
With this, the government has removed the 3% floor of the cash reserve that banks are required to keep with the central bank. This is now pegged at 6% but theoretically can go down to zero. Till recently, banks used to earn 3.5% interest on the cash reserve they were keeping with RBI above the minimum 3% level.