RBI raises CRR by 75 bsp, projects growth to 7.5 pc

Valley bankers expect lending rate hike

BILAL HUSSAIN

SRINAGAR: The Reserve Bank, central bank of India, on Friday left key interest rates unchanged. The bank in its policy stance increased the cash reserve ratio (CRR) of scheduled banks by 75 basis points from 5.0 per cent to 5.75 per cent. The valley bankers and experts here believe it is inline with their expectation.

The cash reserve ratio — the amount of bank deposits and borrowings that banks must keep with the RBI— of their net demand and time liabilities (NDTL) would be increased in two stages, in the first stage 50 basis points increase would be effective form the fortnight beginning February 13, 2010, followed by the next stage of increase of 25 basis points effective from the fortnight beginning February 27, 2010. The increase of CRR would result in about Rs 36,000 crore absorption of liquidity from the system.

Chairman Ellaquai Dehati Bank, A U Tak told Kashmir Times that the CRR hike by the Reserve Bank of India (RBI) is not at all a surprise. “It is on expected lines.”

According to Tak there would not be much impact of CRR hike in the Valley. He substantiates his argument by saying the CD (credit deposit) ratio in the whole valley is low, ‘so less or little impact in the valley’.

The profitability of the banks is going to get hit by the CRR hike as it would shrink the margins. “Banks do not earn any interest on the CRR and given the state of credit off-take, it will be very difficult for banks to pass on these costs to clients. So, most of the heat from this tightening will be taken by banks.” However, Tak believes that in immediate future the rise in advance rates could be expected.

Experts here believe that the CRR hike would slow the credit off-take as the banks are expected to raise the lending rates. “This would affect the growth rate in the state,” said an expert.

The RBI said that the Indian economy showed a degree of resilience as it recorded a better-than-expected growth of 7.9 per cent during the second quarter of 2009-10. Subsequent data releases confirm the assessment that the economy is steadily gaining momentum, though public expenditure continues to play a dominant role, and performance across sectors is uneven, suggesting that recovery is yet to become sufficiently broad-based.

In the Second Quarter Review of October 2009, we projected GDP growth for 2009-10 of 6 per cent with an upside bias. Recent movements in the indicators of real sector activity suggest that the upside bias has materialised. Assuming a near zero growth in agricultural production and continued recovery in industrial production and services sector activity, the baseline projection for GDP growth for 2009-10 is now raised to 7.5 per cent.

For several months, rapidly rising food inflation has been a cause for concern. There are indications that the sustained increase in food prices is beginning to spill over into other commodities and services as well. The October 2009 Review projected WPI inflation for end-March 2010 of 6.5 per cent with an upside bias. The upside risk in terms of higher food prices reflecting the poor south-west monsoon has already materialised. Some additional factors such as higher global crude prices and less than expected seasonal moderation in food prices have also exerted upward pressure on inflation. Based on the latest evidence, the baseline projection for WPI inflation for end-March 2010 is now raised to 8.5 per cent, RBI said.

The RBI expect three major outcomes from the policy one reduction in excess liquidity will help anchor inflationary expectations. Second, the recovery process will be supported without compromising price stability. And the thirds, the calibrated exit will align policy instruments with the current and evolving state of the economy.