RBI likely to raise CRR by mid-Jan: J&K Bank

Sunday 27th of December 2009 04:10:26 AM


RBI likely to raise CRR by mid-Jan: J&K Bank




The Reserve Bank may raise the cash reserve ratio by up to 50 basis points in the second week of January to suck liquidity from the system, said Haseeb Drabu, a known economist and Jammu & Kashmir Bank chairman.

"Currently the liquidity conditions (are tight)...because of the advance tax flows.Once that money comes back into the system you will see a liquidity flush.The RBI may actually start pumping out liquidity through a CRR hike by around 25-50 basis points," Drabu said on the sidelines of a function here to launch J&K Bank calendar for 2010.

The cash reserve ratio (CRR) refers to the portion of funds that banks have to keep with the central bank.

Moreover, Dabru added, the macroeconomic indicators do point to a hardening of interest rates in the days ahead.

The Reserve Bank is slated to come out with the third quarter review of the monetary policy on January 29 amid intense speculations that it may signal an interest hike to tighten money supply to contain the rising inflation.

Drabu, however, said tightening of liquidity by RBI through hiking CRR or even raising repo rate might not immediately impact the banking sector's interest rates as the market has already factored in such possibilities.

"I don't think interest rate would change dramatically or instantly after RBI action...I don't see banks' lending will change in response to either a CRR hike or even a repo rate hike," he added.

Following the global financial meltdown in September 2008, the RBI took a host of measures to make liquidity available to the fund-starved industry.

The central bank had reduced the short-term lending (repo) rate by 425 basis points to 4.75 per cent and short-term borrowing (reverse repo) rate by 275 basis points to 3.25 per cent.The RBI also reduced the cash reverse ratio by 400 basis points to 5 per cent.

With the economy showing signs of recovery and inflationary pressure becoming more and more evident, the RBI in its October policy initiated the first phase of exit by raising the statutory liquidity ratio (SLR)--the portion of funds banks invest in government bonds--by one percentage point to 25 per cent and withdrawing some other steps.

The Prime Minister Economic Advisory Council chairman C Rangarajan recently said the Reserve Bank could reduce money supply and raise interest rates to tame the rising prices of food articles.

The food inflation is over 18 per cent in December and the second quarter growth rate has also touched 7.9 per cent.

Besides, the overall wholesale price has rose massively to 4.78 per cent during November compared to 1.34 per cent in the previous month.

The RBI in its monetary policy review in October has revised the inflation forecast to 6.5 per cent by March-end from 5 per cent earlier.

Agencies
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