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No lending rate cuts as RBI raises CRR 50 bps

MONETARY POLICY

BS Reporter  |  Mumbai 

The RBI kept key policy rates unchanged.
The Reserve Bank of India today kept key policy rates unchanged but increased the cash reserve ratio (CRR) on continued inflation concerns, ending any hope of banks reducing lending rates for both retail and corporate borrowers.
In its mid-term review of monetary policy today, RBI raised the CRR, the proportion of deposits banks have to keep with the central bank, by 50 basis points to 7.5 per cent from November 10 to absorb about Rs 16,000 crore of excess liquidity.
It has done so owing to persistent underlying inflationary expectations following high global oil prices and liquidity caused by large capital inflows.
Overall, the CRR has been raised 225 basis points since January 2007, the steepest increase since RBI started raising rates in October 2004.
The stock market was lukewarm in its response as it had already factored in the CRR cut. The Sensex ended down 194.16 points, or 0.97 per cent, at 19,783.51. The benchmark 10-year federal bond yield rose 5 basis points to 7.86 per cent in the afternoon trade.
Meanwhile, largely meeting expectations, RBI kept unchanged the repo rate and the reverse repo rate at 7.75 per cent and 6 per cent, respectively, suggesting the central bank is for status quo on policy signals on interest rates for now.
Successive interest rate hikes have helped the central bank rein in inflation to closer to 3 per cent and also bring credit growth within its target of 24-25 per cent.
"There is huge liquidity on account of large capital inflows relative to our absorption capacity. There is some satisfaction on the growth side and inflation side, barring the issue of liquidity," RBI Governor Y V Reddy said while announcing the policy.
Commenting on the policy, Minister P Chidambaram said, "It is status quo. I am sure that banks will draw the correct message from the RBI policy."
K V Kamath, managing director and CEO of ICICI Bank, the country's second-largest bank, told a television channel: "Banks will take a hit on account of the hike in the CRR. The CRR hike would mean if there was any thought of bringing down rates, then we would have to redraw our plans."
RBI's moves suggest that monetary tightening is far from over given that the capital inflows are unlikely to abate despite restrictions on participatory notes, derivatives used by foreign investors that are not registered in India to trade on the Indian stock markets.
Overseas investors have bought stocks and bonds worth $18.7 billion this year, double the record $9.46 billion in 2005. That has sent India's benchmark Sensitive index higher by 45 per cent this year to an all-time high and the rupee by 12.2 per cent.
RBI is clearly still preoccupied with inflation as well, despite the fact that the headline wholesale price inflation is currently close to 3 per cent, well within its annual target of 5 per cent. It has lowered its medium-term inflation target to 3 per cent from 4.0-4.5 per cent set in April 2007.
The central bank has pointed out that rising oil and food prices are a risk because the wholesale price index is being artificially depressed by the oil subsidy scheme which has seen Indian domestic oil prices unchanged since February 2007 at $57 per barrel.
At the current price of around $90, crude oil is nearly 60 per cent higher than it was in February, while the rupee has risen just 12 per cent against the dollar, according to HSBC's Asia economist, Robert Prior-Wandesforde.
RBI has said it would manage capital flows actively as the expansionary effects of these flows need to be moderated to keep money supply in check. Money supply is currently at 21.8 per cent against RBI's target of 17-17.5 per cent.

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First Published: Wed, October 31 2007. 00:00 IST
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