Discussion Forum on CRR Hike

What do experts read into the rate hike?

MBN Rao, CMD, Canara Bank, said the CRR hike has been triggered by over 7% inflation. “The fact that RBI increased CRR as against increasing the repo rate is to control the money supply availability at the disposal of banks in terms of credit expansion. To that extent, we will take it as a hint that there should be a reallocation of credit to sectors. Banks will have to await RBI policy to review interest rates. This hike does not signal a rate hike,” he added.

ICICI Prudential's Nilesh Shah also shares Rao’s reactions. He feels inflation is a concern right now and probably RBI would like to manage liquidity rather than raise rates. “Somewhere, liquidity management will become key to manage inflation rather than just raising rates, which could be counterproductive with growth. Inflation is a bit driven by supply side limitations and you can only create capacity by lending money, not by restricting money. RBI would like to wait and see the impact of a CRR hike rather than raise rates during the Credit Policy.”

Shubhada Rao, Chief Economist, Yes Bank, said the fact that RBI brought it ahead of the Credit Policy carries some amount of surprise but elevation of inflation at over 7-7.5% is what has prompted it. “The impact of this would be felt a bit later. If one looks at the fiscal measures and CRR, one would tend to think that a repo rate hike possibility is now at abeyance. But I still would not rule out some additional measures on April 29. There could be a possible small hike in the repo rate but the probability has reduced clearly.

HDFC Chairman Deepak Parekh said a CRR hike was expected with this level of inflation. “Rs 18,500 crore mop up over a two-week period is not a very large bump up, the liquidity today in the market is reasonable. If this liquidity continues, we may not even increase interest rates, so it is too early to tell what the impact on interest rates is going to be.”

Parekh does not expect a further increase on April 29. “This will be the last of actions for the next few weeks to come in the foreseeable short future.”

However, Nitin Jain, Primary Dealers Section, ICICI Securities, feels conditions are ripe for a series of action by RBI. “This will be just a precursor to the rate hike in the policy.”

Does this hike imply a rise in deposit rates?

Chanda Kochhar, Joint MD, ICICI Bank, does not think so. She said one should not jump to conclusions that deposit rates would rise as there is currently liquidity in the system. “This measure is going to take away a large part of that liquidity. But it is still not creating a negative gap. We have to watch over the next one month as this becomes effective and how other parts of liquidity in the system moves."

However, Keki Mistry, MD, HDFC, feels deposit rates are not going to go up significantly though wholesale funding cost might go up a little bit. “The hike was expected. We need to see what kind of impact it has on change in costs of funds and deposits, i.e. the rate at which we raise funds. We will then take a call on lending rates."

Will loans get expensive now?

HN Daruwala, Chairperson, Central Bank of India, said the bank will take a holistic view after the April 29 Monetary Policy. “Inflation has to be curtailed and contained, then it goes without saying that we will have to go in for a higher lending rate. RBI Governor YV Reddy may increase interest or increase the repo rate. So, we will take a call on whether to raise rates after the Monetary Policy gets announced.”

The waiting game is also being played by HDFC Bank. Ashish Parthasarthy, Head-Treasury, HDFC Bank said the India’s second largest private sector bank would wait for the policy and take a appropriate decision thereafter.

How will bond markets react on Monday?

HDFC Bank’s Parthasarthy said bond yields would go up. “Though there was an expectation of monetary action now or at policy time, you will see bond yields moving up because of the action. Pure supply could also take the 10-year to 8.25%. However, if repo rates were to go up sometime if not immediately, you could see the 10-year anywhere between 8.25-8.5%. I don’t think it will go beyond that.”

Even ICICI Securities’ Nitin Jain sees the 10-year bond crossing 8.5% post policy. “The 10-year paper could go anywhere on Monday. It depends on how the market takes collectively all these measures and what view they form on Monday. Now, the talk is also of a reverse repo rate hike, not just a repo rate hike. RBI is reducing growth target to 7-7.5%. If that materializes, then the 10-year can cross even 8.5% after the policy.”

JP Morgan’s Krishnamurthy Vijayan said the hike is certainly going to effect investors who are thinking in terms of long-term bond funds. “After the last glorious year of equity, it was only now that people have started thinking in terms of asset allocation. That might affect sentiment a bit. Surprisingly, the bond markets had factored this in last week. Most bond fund managers have already built it into their strategy though NAVs may not be that drastically impacted there.”