India's Largest Database on New Projects
Cash reserve ratio hiked
August 2, 2007: The Reserve Bank of India has hiked the Cash Reserve Ratio in order to drain out the excess supply of funds and ensure price and financial stability. CRR is the proportion of the deposits banks have to keep with the RBI, which has been increased by 0.5 percentage points to 7 per cent. The CRR hike will come into effect from the fortnight beginning August 4, 2007 and will take out Rs.16,000 crore from the system at one go.
The RBI has not changed its key rates such as the reverse repo at 6 per cent, the repo rate at 7.75 per cent, and the bank rate at 6 per cent. The hike is made in order to manage the appropriate liquidity, which is of great importance. It may be also noted that the CRR has been hiked due to the recent developments in the financial markets in the country and the uncertainties prevailing in the global markets.
In response to the policy measures, banks have started cutting deposit rates to reduce their cost of funds. Public sector banks such as Bank of India and Bank of Baroda have announced 50 basis points reduction in the one-year deposit rates. Normally, a CRR hike is followed by an increase in lending rates. However, this time due to excess liquidity, banks are unlikely to hike lending rates.
The RBI has also allowed banks to keep more funds with it under the daily liquidity adjustment facility by removing the Rs.3,000 crore cap imposed in March 2007. But the interest paid by the RBI on such short-term funds can henceforth be either at fixed rate or at variable rates which means that the RBI can undertake short-term lending and borrowing through repo and reverse repo at a rate of interest which its thinks appropriate.
Source: The Hindu Business Line