Struggling to contain inflation within its targeted 5-5.5 per cent range, the Reserve Bank of India raised the cash reserve ratio (CRR) 50 basis points to 6.5 per cent from April 28 and the repo rate 25 per cent to 7.75 per cent with immediate effect.
With this, the central bank has raised the CRR thrice, by 150 basis points, and the repo rate five times, by 125 basis points, in the current financial year.
The CRR is the proportion of cash balances the RBI requires banks to park with it. The higher CRR will suck out Rs 15,500 crore from the banking system, adding to the Rs 27,500 crore drained through two previous increases.
THE COST OF INFLATION CONTROL
March 30, 2007 : CRR hiked by 50 bps to 6.5%; Repo rate hiked by 25 bps to 7.75%
Feb 14, 2007: CRR hiked by 50 bps to 6%
Jan 31, 2007: Repo rate hiked by 25 bps to 7.5%
Jan 31, 2007: General provisioning on standard commercial real estate loans, personal loans & capital market loans doubled to 2%
Dec 11, 2006: CRR hiked by 50 bps to 5.5%
Oct 31, 2006: Repo rate raised by 25 bps to 7.25%
July 25, 2006:Reverse repo and repo rates hikes 25 bps each to 6% and 7% respectively
June 8, 2006:RBI raises reverse repo and repo rates by 25 bps to 5.75% and 6.75%, respectively
The RBI will also reduce the interest on CRR balances from 1 per cent to 0.5 per cent. The rise in the repo rate will make it more expensive for banks to access overnight liquidity from the central bank. The central bank’s monetary tightening measures followed release of data that showed wholesale price inflation at 6.5 per cent for the third week in succession, ending March 17, 2007.
March 30, 2007 : CRR hiked by 50 bps to 6.5%; Repo rate hiked by 25 bps to 7.75%
Feb 14, 2007: CRR hiked by 50 bps to 6%
Jan 31, 2007: Repo rate hiked by 25 bps to 7.5%
Jan 31, 2007: General provisioning on standard commercial real estate loans, personal loans & capital market loans doubled to 2%
Dec 11, 2006: CRR hiked by 50 bps to 5.5%
Oct 31, 2006: Repo rate raised by 25 bps to 7.25%
July 25, 2006:Reverse repo and repo rates hikes 25 bps each to 6% and 7% respectively
June 8, 2006:RBI raises reverse repo and repo rates by 25 bps to 5.75% and 6.75%, respectively
The RBI will also reduce the interest on CRR balances from 1 per cent to 0.5 per cent. The rise in the repo rate will make it more expensive for banks to access overnight liquidity from the central bank. The central bank’s monetary tightening measures followed release of data that showed wholesale price inflation at 6.5 per cent for the third week in succession, ending March 17, 2007.
Impact of these hikes
The RBI has indicated that a sum of close to Rs 15,500 cr will be sucked out of the banking system, thereby further tightening liquidity (Call touched a high of 80% during the day) in the system.
Banks will witness a marginal interest loss in their CRR deposit as the interest paid on CRR has been reduced from 1% to 0.5% whilst the CRR has been hiked by 25 bps.
The RBI has indicated that a sum of close to Rs 15,500 cr will be sucked out of the banking system, thereby further tightening liquidity (Call touched a high of 80% during the day) in the system.
Banks will witness a marginal interest loss in their CRR deposit as the interest paid on CRR has been reduced from 1% to 0.5% whilst the CRR has been hiked by 25 bps.
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