Thursday, August 2, 2007

The RBI & You

The Reserve Bank of India Governor, Dr Yaga Venugopal Reddy, has taken three significant steps in the first quarter credit policy review.


1) The Cash Reserve Ratio (CRR) has been hiked by 50 basis points from 6.5% to 7%. This is the amount that banks need to deposit with the RBI.

2) The repo (7.75%), reverse repo (6%) and bank rates (6%) have been left unchanged.

3) The ceiling of Rs 3,000 crore currently set on the daily reverse repo has been withdrawn.

Now banks are expected to review their credit and deposit rates following the CRR rate hike. The hike in CRR would suck out an estimated Rs 15,000 - 16,000 crore from the banks. Though they will not act hastily and lower rates in a hurry, bankers have already hinted at a downward revision of deposit rates.

The CRR rate hike will leave the banks with lesser funds available for loans. Hence, their margins are likely to come under pressure. So one may expect deposit rates to lower, but not loan rates.

Till date, for every CRR hike, banks raised the interest charged on loans to preserve their margins. Since interest rates on loans are already high, they may no longer want to increase them. Secondly, credit growth is slowing down and banks have plenty of money that they mobilised in the past year ever since rates were moving up. So this time around, they may lower the interest paid to depositors.

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