New Delhi: Contrary to market expectations, the Reserve Bank of India, in its monetary policy review on 29 July hiked the Cash Reserve Ratio (CRR) by 25 basis points (bps) to 9%.
The repo rate has also been revised upwards by 50 bps to 9%. This is the first time since November 1999 that the CRR has touched a level of 9%. However, the apex bank has kept the bank rate unchanged.
“With credit growth for the industry at around 26% levels till June’08 and inflation continuing to remain high, hike in CRR/ Repo was expected. However the quantum of hike was on the higher side, especially Repo. This would result in increased rates thereby lowering the credit growth and would also put pressure on the net interest margins for banks as the cost of funds are expected to increase,” said Abhishek Agarwal, Research Analyst – Banking (Associate Vice President), Religare Securities.
”With this hike benchmark rate has increased to around 9.5% and banks having high proportion of AFS portfolio would have to make higher provisions towards MTM losses. Union Bank of India, Allahabad Bank, Indian Bank would be the most impacted on this account,” he added.
The hike in Repo rate, Reserve Bank’s overnight lending rate to banks, would come into effect immediately, while the 0.25% increase in CRR, the percentage of amount banks are required to park with the apex bank, would be effective from the fortnight beginning 30 August.
“While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5% as soon as possible and around 3% over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12% to a level close to 7% by 31 March, 2009,” the policy stated.
Real GDP growth in 2007-08 has also been revised upwards to 9% by the Central Statistical Organisation (CSO) in its end-May 2008 estimates from the advance estimates of 8.7% released in February 2008.
The move expected to suck out Rs8,000 crore from the system will also make commercial, home, personal and car loans dearer.
“As expected, the RBI has not only re-iterated its concern over sustained high inflation and its control as top priority, but also maintained its firmly hawkish stance. This development, we believe, will lead to another round of rate hikes in the system as deposit and lending rates are raised considering the higher borrowing costs for banks and the pressure on liquidity,” said Hitesh Agrawal, Head of Research, Angel Broking.
“From the stock market perspective, with capital becoming dearer, we expect the impact of this to be visible not only on the rate sensitive sectors like Banking, Realty and Auto, but also on corporate profitability as a whole as most sectors and companies have embarked on huge capacity expansion plans,” he Agrawal added.
Earlier in June, the central bank raised the repo rate by 75 basis points in two steps and announced a 50 basis point increase in the cash reserve ratio to 8.75%.