The CRR-unch that bites: RBI hikes rate by 50 bps
The measure will come in two doses-5.75% from February 17 and then 6% from March 3.
By TNN |
MUMBAI: THE war against inflation has turned brutal. After a clampdown on futures trading in commodities and a cut in import duties, close to Rs 14,000 crore will now be sucked out of banks. There will be less money left in the system and banks will be forced to lend less. The aim is to rein in inflation, which has become a hot potato for the government.
On Tuesday, well after market hours, RBI stepped in, for the second time in two months, with the most potent monetary policy tool. The central bank announced a 50 basis points hike in the cash reserve ratio (CRR)-the slice of customer deposits that banks set aside as cash-from 5.5% to 6%.
The measure will come in two doses-5.75% from February 17 and then 6% from March 3. RBI has justified the move “in view of the paramount need to contain inflation expectations and in the light of current liquidity conditions”.
On December 8, RBI had stunned the market with a 0.5% CRR hike to 5.5%. Tuesday’s decision will further harden interest rates across products, spring a nasty surprise on financial markets like stocks and bonds, and may even cool down spiralling property prices. In Mumbai, bond traders, caught on the wrong foot, exchanged SMSes, joking that ‘the hike is a Valentine’s day Day gift from RBI’.
The question is will the government settle for a lower GDP growth to curb inflationary pressures? Maybe not. It could well be a short-term measure to take out liquidity following RBI’s intervention in the currency market (as RBI buys dollar coming in as FII and FDI investment, it releases money into the system and creates liquidity). Besides, inflation may inch up if the government, which has largely refrained from spending, decides to spend in the last quarter. Though the central bank had warned the market that a CRR hike cannot be ruled out, banks continued with their lending and many bond market traders felt that the worst was over.
Banks and bond players, however, are upset with the timing of the two CRR hikes. Since both hikes came immediately after RBI, as banker to the government, completed two sets of government bond auctions, banks and bond houses, which had invested in the auctions, had to take a hit. For some bond houses, the hikes will wipe out their last 10-month earnings. However, surprise policy moves like CRR hikes are things that the market will possibly have to live with in the days to come.
On Tuesday, well after market hours, RBI stepped in, for the second time in two months, with the most potent monetary policy tool. The central bank announced a 50 basis points hike in the cash reserve ratio (CRR)-the slice of customer deposits that banks set aside as cash-from 5.5% to 6%.
The measure will come in two doses-5.75% from February 17 and then 6% from March 3. RBI has justified the move “in view of the paramount need to contain inflation expectations and in the light of current liquidity conditions”.
On December 8, RBI had stunned the market with a 0.5% CRR hike to 5.5%. Tuesday’s decision will further harden interest rates across products, spring a nasty surprise on financial markets like stocks and bonds, and may even cool down spiralling property prices. In Mumbai, bond traders, caught on the wrong foot, exchanged SMSes, joking that ‘the hike is a Valentine’s day Day gift from RBI’.
The question is will the government settle for a lower GDP growth to curb inflationary pressures? Maybe not. It could well be a short-term measure to take out liquidity following RBI’s intervention in the currency market (as RBI buys dollar coming in as FII and FDI investment, it releases money into the system and creates liquidity). Besides, inflation may inch up if the government, which has largely refrained from spending, decides to spend in the last quarter. Though the central bank had warned the market that a CRR hike cannot be ruled out, banks continued with their lending and many bond market traders felt that the worst was over.
Banks and bond players, however, are upset with the timing of the two CRR hikes. Since both hikes came immediately after RBI, as banker to the government, completed two sets of government bond auctions, banks and bond houses, which had invested in the auctions, had to take a hit. For some bond houses, the hikes will wipe out their last 10-month earnings. However, surprise policy moves like CRR hikes are things that the market will possibly have to live with in the days to come.
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