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.
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.
how do bankers view this monetary policy? CNBC-TV18 reports:
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.
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.
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.
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.
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.
Kotak, vice chairman and managing director, Kotak Mahindra Bank, said one-year
deposit rates are seen at 9 per cent.
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
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.
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.
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.
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.
markets will realize that the immediate panic, which we are seeing just now, will
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