Interest Rates Likely To Remain Untouched Despite CRR Hike

Banks'' lending rates will remain largely untouched by the Reserve Bank of India''s (RBI''s) decision today to hike the cash reserve ratio (CRR). Conversely, banks are likely to stop giving short-term loans at discounted rates with part of the liquidity being withdrawn by the RBI in its first-quarter review of the 2007-08 monetary policy. Banks also began partially correcting peak rates offered on one-year deposits after the RBI kept reverse repo and repo rates unchanged for the second time.

Canara Bank, Bank of Baroda and Bank of India announced an interest rate reduction on their special one-year deposit schemes by 50 basis points to 9 per cent today. The increase in CRR, the cash balances banks are required to keep with the central bank, by 50 basis points to 7 per cent from August 4 will drain Rs 16,000 crore. Unlike earlier occasions, the current CRR hike did not trigger lending rate increases as banks will be flush with liquidity even after the outflow. This is the fourth identical increase in CRR since December 2006 and it absorbs only a part of the excess liquidity.

The RBI also removed a Rs 3,000-crore limit, imposed in March, on the amount it absorbs through reverse repo auctions. Reverse repo is an instrument by which the central bank absorbs money from banks against government securities normally for a day. This measure is expected to lift the overnight call money rates from the sub-1 per cent levels prevailing for over two months. The limit had spurred banks with spare cash to lend more in the money market.