In a move to contain rising inflation, the Reserve Bank of India (RBI) hiked the Cash Reserve Ratio (CRR) — the portion of deposits that commercial banks are required to keep with the central bank — by 75 basis points from 5 per cent to 5.75 per cent.
“As a result of the CRR increase, about Rs.36,000 crore of excess liquidity will be absorbed from the system,” said RBI Governor Subbarao, while addressing a press conference here on the Third Quarter Review of Monetary Policy 2009-10, on Friday.
“We hiked the CRR without hurting growth,” said Dr. Subbarao. “There is sufficient liquidity in the system,” even after the withdrawal of Rs.36,000 crore from the banking system.
The CRR increase would be in two stages: the first stage of increase of 50 basis points will be effective the fortnight beginning February 13, 2010 followed by the next stage of increase of 25 basis points effective the fortnight beginning February 27, 2010.
The RBI left all other indicative lending and borrowing rates unchanged.
Bankers “indicated that the monetary measures announced by the Reserve Bank may not put immediate pressure on lending rates,” Dr. Subbarao said.
The RBI also upped its economic growth projection for the end of current fiscal to 7.5 per cent from its earlier estimate of 6 per cent.
It estimated that inflation will touch 8.5 per cent by March-end from its earlier projection of 6.5 per cent in October.
“However,” said Dr. Subbarao, “on the assumption of a normal monsoon and global oil prices remaining around the current level, it is expected that inflation will moderate from July 2010.”
The Reserve Bank of India (RBI) on Friday tightened the monetary policy by raising the Cash Reserve Ratio — the portion of deposits that commercial banks are required to keep with the central bank —- by 75 basis points to tame rising inflation.
This increase in CRR from 5 to 5.75 per cent would absorb Rs.36,000 crore of excess liquidity from the system.
However, the RBI retained indicative interest rates, including repo rate and reverse repo rate — the rates between the RBI and the commercial banks — at their current levels. As a result, commercial banks are unlikely to raise lending rates from the current levels.
“This time around policy decision was much more complex and challenging,” said RBI Governor D. Subbarao, while addressing a press conference here on the Third Quarter Review of Monetary Policy 2009-10, on Friday. He said there was sufficient liquidity in the economy even after sucking out Rs.36,000 crore from the banking system. “We hiked the CRR without hurting growth,” Dr. Subbarao added.
The RBI expects three major outcomes from the policy action: Reduction in excess liquidity will help anchor inflationary expectations; the economic recovery process will be supported without compromising price stability; and the calibrated exit from expansionary monetary policy will align policy instruments with the current and evolving state of the economy. The central bank upped its economic growth projection for the end of current fiscal to 7.5 per cent from its earlier estimate of 6 per cent. It also estimated that inflation would touch 8.5 per cent by March-end from its earlier projection of 6.5 per cent in October.
However, on the assumption of a normal monsoon and global oil prices remaining around the current level, it is expected that inflation will moderate from July 2010, said Dr. Subbarao.
This moderation in inflation will depend on several factors, including the measures taken and to be taken by the Reserve Bank as a part of the normalisation process.
Banks felt that credit growth prospects remain favourable going forward. They emphasised the need to expand their capital to sustain their lending operations in future. Banks indicated that they have reduced their lending rates responding to earlier monetary easing by the RBI. Consequently, “their net interest margins have come under pressure. Non-performing assets (NPAs) are expected to increase, particularly from the restructured assets.”
Bankers also informed that if the government borrowings next year are large, they could put pressure on resources and interest rates as credit is expected to pick up significantly.
Banks were concerned about their growing exposure to the infrastructure sector and suggested that policy intervention is required from the government and the RBI to address the issue of the asset-liability mismatch and exposure in their balance sheets.