RBI hikes repo rate CRR

On 29 July 2008, the Reserve Bank of India increased the repo rate by 50 basis points to 9 per cent. It also hiked the cash reserve ratio (CRR) by 25 basis points to 9 per cent beginning 30 August 2008.

While the repo rate hike is expected to make overnight funds costlier for banks, the CRR hike is expected to marginally reduce the lendable funds of banks.

Banks are aggressively using the repo facility of the RBI since the beginning of July. They borrowed almost Rs.38,900 crore per day from the RBI through its liquidity adjustment facility. Therefore the hike in the repo rate by the RBI will surely put some pressure on the cost of funds of banks.

The 25 basis points hike in the cash reserve ratio will suck out about Rs.8,000-8,500 crore of liquidity from the banking system. This will reduce the lendable resources of banks and, coupled with the repo rate hike, will bring the net interest margins of banks a bit under pressure.

Surplus liquidity in the banking system stood at a robust Rs.1,37,215 lakh crore as on 18 July 2008. About Rs.1,30,000 of this surplus liquidity comprises long term securities issued under the market stabilisation scheme. None of these securities are maturing before April 2009.

In this context, it may be noted that demand for credit remains high with credit growth well outpacing deposit growth. SCB credit is growing at around 25-26 per cent while SCB deposits are growing by around 21-22 per cent. According the disaggregated data from the monetary authority's quarterly review, growth in credit to industry accelerated further from 26.4 per cent a year ago to 26.9 per cent as on 23 May 2008. Growth in credit to small scale industries accelerated sharply from 29.5 per cent to 52.1 per cent during this period. However, the continuous rise in interest rates over the past one year did take its toll on personal loans. Growth in personal loans slowed from 23.9 per cent a year ago to 15.9 per cent as on 23 May 2008.