labels: rbi, economy - general, banks & institutions
CRR hike: What bankers saynews
31 July 2007

The Reserve Bank of India raised the cash reserve ratio (CRR) by 50 basis points in its monetary policy today. (See: RBI raises CRR to 7 per cent)
CRR, the amount the commercial banks need to maintain with the RBI, is based on a fixed percentage computed on each bank''s total time and demand liabilities. A CRR of 7 per cent means that the banks need to set aside Rs7 for every Rs100 they receive in deposits.

>The CRR imposes a cost on the banking system. This is because banks do not receive more than 6.5 per cent interest on the CRR, while they earn higher returns if the money is lent to customers or invested in bonds.

>So, how do bankers view this monetary policy? CNBC-TV18 reports:

>MBN Rao, chairman, Canara Bank, said that lending rates might remain constant for some time. He said the bank might cut deposit rates due to RBI''s CRR hike.

>According to Rao, the pressure on interest rates on deposits and lending rates will ease. He feels that banks are unlikely to raise lending rates inspite of a CRR hike.

>Rao expects a cut in deposit rates because of the surplus liquidity in the system. He feels that there is a case for a downward review in the deposit rate. "Much of the liquidity is coming into the system because of the net forex inflows and based on the short-term money, banks may not be able to lend. In terms of lending rates, we need to see whether the liquidity is short-term or is it going to be on a long-term sustainable basis," he added.

>As far as the lending rates are concerned, Rao feels that for a while they may remain sticky. "The main reason or the source of the present liquidity is the net forex inflows. Once we are convinced that the net forex inflows are going to be on a sustainable basis and will remain there, then that could be used as a source of funding to fund the bank credit.

>If you could see in terms of demand-supply, the incremental CD ratio has now come down to 69 per cent from a high of 110 per cent. Demand for money in terms of deposits raised has also come down. To that extent, the pressure of interest rates on deposits should ease. The pressure on lending rates will ease because much of the lending in the recent past has been on term basis. We need to have a clear understanding of how the interest rate curve is going to behave in the medium and long-term," he added.

>Uday Kotak, vice chairman and managing director, Kotak Mahindra Bank, said one-year deposit rates are seen at 9 per cent.

>"The one-year deposit rate would be around the 9 per cent mark. Essentially, this means no significant drop in lending rates. While we do not see this as a signal for dramatically increasing interest rates, it is more of a stability and continuity of where we are as of now. There is no cause for going out and dramatically reducing interest rates. For sustained growth, we need stability and the objective of the RBI is to make sure that through this period we maintain stability," Kotak said.

V Shrikanth, head of fixed income, currencies and commodities, Citibank, said that RBI might not let the rupee appreciate above 40 to the dollar. He expects to see more intervention from RBI in the forex market.

CRR hike suggests that RBI seems to be concerned about inflation, Shrikanth said. "Market participants have been keenly awaiting these announcements to get a sense of what RBI''s inflation concerns were from having a zero overnight policy, which has been persisting for almost two months and this has also caused short-term rates of one-year and less to come down by almost 200 bps in bills, sops, and bonds, that''s one thing the market wanted to understand.

>The market also wants to get a sense as to what tools would RBI use to manage liquidity. Against this backdrop and expectations, the increase in CRR by 15 bps to 7 per cent, and the removal of the reverse repo ceiling of Rs3,000 crore, brings out their overall concern on inflation, arising from having overnight rates being so close to zero. That''s a clear point that they have got across to the market. Therefore, there is going to be an alignment in rates," he added.

Abheek Baruah, chief economist, HDFC Bank, said post the CRR hike, the RBI''s ability to intervene increases and it is mildly negative for the rupee. The 91-day T-Bills may go up by 150 bps, he added.

"One of the ways of looking at this set of measures is that although it could create a short-term bounce in the rupee, it gives the RBI the leeway, or the headroom, to persistently intervene a little more strongly perhaps because liquidity is getting absorbed more effectively because of these additional measures. So the ability to intervene subsequently, although you might see a bit of a bounce in rupee in the short-term, the ability to come in and intervene without suffering the liquidity consequences perhaps goes up.

>"So I am not too sure that this is unambiguously rupee positive, it might be rupee positive in the very short-term but in the longer-term, if flows were to continue, the RBI''s ability to intervene perhaps goes up, and from that perspective, it is perhaps mildly rupee negative," Baruah said.

Ajay Mahajan of Yes Bank feels that the CRR hike will probably do away with the excess liquidity in the system. On whether does he see the bond market heading from here on, he said, "I was expecting CRR to be hiked to 7.85-7.9 per cent. We are bang in the middle right now. At another 5-7 bps higher from here, the bond markets will start looking attractive again, because the CRR hike only takes away excess surplus liquidity from the system. The liquidity was as high as Rs 60,000-65,000 crore.

>"There is no real measure that is possible today, because the reverse repo has not really been functional for the last three-four weeks. That is why the market liquidity was and MSS had been held steady for so long. I think the CRR hike will actually just do away with some excess liquidity from the system.

>"The markets will realize that the immediate panic, which we are seeing just now, will probably sober away. We think there will still be significant value in the 10-year yield curve in India at 7.85-7.9 per cent. We expect the bond market to rally significantly from here and probably touch 7.5 per cent in the course of the next two-three months."




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CRR hike: What bankers say