RBI squeezing money flows

17 July 2006

The Reserve Bank of India (RBI) is likely to reduce or even scrap altogether interest paid on cash reserve ratio (CRR) of banks, reports quoting official sources said. This is expected to result in a Rs2,000-crore loss to the public sector banks.

The decision, taken to curb inflationary trends in the economy amidst slackening FII inflows and rising interest rates abroad, follows last month's amendment to the RBI Act.

Banks were earning interest of 3.5 per cent on their cash reserve over the stipulated three per cent base up to five per cent. The amended Act abolishes the three per cent floor for CRR.

The RBI Act amendment enables the central bank to fix the mandatory level of CRR against the previous band of 3 per cent to 20 per cent. The finance ministry has also asked the banking industry to improve performance amidst an influx of foreign banks to the country.

Market also expects a hike in interest rates in the coming credit policy, although analysts are not sure of the extent and timing of the rate hike.