MUMBAI: The RBI has increased cash reserve ratio by 75 bps to 5.75%, whereas key interest rates were unchanged in its third quarter review of the Annual Monetary Policy. CRR hike would suck out Rs 36,000 crore liquidity from the system. The hike would happen in two stages, the first stage of hike of 50 bps will be effective from February 13 and the next 25 bps from February 27. RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%.
RBI projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year. It also said that the inflation would be around 8.5% in March.
This policy is the first major move to mark the reversal of the easy money policy adopted since October 2008. A CRR hike has not come as a shocker for markets as the same has largely been factored into expectations.
Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term.
Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.
"With a stronger recovery in India, the risk of food price inflation causing generalized inflation cannot be ignored," the RBI said in a report on Thursday.
After cooling off for three consecutive weeks, food inflation was back on an upward trail. It rose to 17% on January 16 - from 16.81% a week earlier - on the back of rebounding prices of eggs and vegetables.
Food inflation had come down to 16.81% in the preceding week (January 9) after spotting the 20% mark in December, the highest in a decade.
High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till September last year.
Industrial output grew 11.7 per cent in November from a year earlier, as stimulus measures since October 2008 to overcome the global credit crunch supported domestic demand.
As expected this step of the Central Bank could be observed in the line of an exit from an accommodative monetary policy in its quarterly credit policy review. Analysts taking cue from last policy review had been expecting the RBI to start exiting its year-old accomodative monetary stance starting in early 2010, as signs emerge of a pick up in growth and inflationary pressures rise.
Friday, January 29, 2010
Banks may tweak sub-PLR if RBI raises cash reserve ratio
Banks are exploring the option of increasing the sub-prime lending rate, mainly offered to companies, while keeping the benchmark prime lending rate (BPLR) untouched.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
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