Monetary policy review indicates economy on growth path
Economic Times, Financial Times, January 31, 2010, Page 1
Vikas Agarwal, ET Bureau
The Reserve Bank of India (RBI) announced a 75 basis points (0.75 percent) hike in the cash reserve ratio (CRR) in its policy review on Friday last. The RBI has kept other policy levers -repo rate, reverse repo rate and bank rate unchanged.
This means the banks will have to keep more in deposit with the RBI. Hence, it will result in drawing out around Rs 36,000 crores from the system.
The RBI's move has come as an unpleasant surprise for the markets as most analysts and fund houses were expecting a 50 basis points hike in the CRR as against the 75 announced.
These are some of the significant aspects of this move:
Impact on liquidity
At present, the domestic economy is dealing with a situation of excess liquidity. Liquidity has gone up due to funds coming in from foreign investors.
This excess liquidity is one of the reasons for the higher inflation, and a hike in the CRR will help in drawing out some of the excess liquidity from the system, and hence in maintaining a balance.
Impact on inflation
The inflation rate has been rising sharply since the last few months. The main reasons that contribute to a higher inflation rate are higher prices of food articles, more liquidity in the system and the lower base effect of last year. This move by the RBI will not have much of an impact on the supply-driven food price inflation.
Also, nothing can be done about the lower base effect of last year. However, it will contain the price rise due to excess money in the system (demand pull inflation).
The RBI has also hiked its expected inflation target for the end of this fiscal year (March 2010) from 6.5 percent to 8.5 percent. This indicates that the RBI feels the CRR hike alone cannot control inflation completely. However, it will help in moderating it.
Impact on credit off-take
The credit off-take in the retail category was quite low. It has picked up slightly during the last couple of months due to the festival season and a number of attractive offers floated by banks.
The hike in the CRR will have some effect on credit growth. The RBI has lowered its credit growth forecast from 18 to 16 percent, in line with expectations.
Impact on interest rates
The hike in the CRR will leave less money with bank to lend. Therefore, indirectly, their cost of funds goes up and there is a case to increase the interest rates.
However, the lower credit offtake and excess liquidity in the system could work in favour of keeping the rates unchanged in the retail loan segment. Many banks have already announced that they will not increase the rates, and will maintain them at the current levels.
However, in the light of this CRR hike, the process of fresh lending is expected to further tighten, and interest rates may go up in the medium term, if certain parameters change further.
Indicators
In this monetary policy review, the RBI has given a clear signal that the domestic economy is back on the growth path. Hence the moves to reverse the expansionary policy stand, which was more-suited for the crisis kind of situation prevalent earlier.
The RBI has started the tightening in order to prevent the economy from overheating. The RBI has also revised its financial year 2011 GDP growth forecast upwards from six to 7.5 percent.
Economic Times, Financial Times, January 31, 2010, Page 1
Vikas Agarwal, ET Bureau
The Reserve Bank of India (RBI) announced a 75 basis points (0.75 percent) hike in the cash reserve ratio (CRR) in its policy review on Friday last. The RBI has kept other policy levers -repo rate, reverse repo rate and bank rate unchanged.
This means the banks will have to keep more in deposit with the RBI. Hence, it will result in drawing out around Rs 36,000 crores from the system.
The RBI's move has come as an unpleasant surprise for the markets as most analysts and fund houses were expecting a 50 basis points hike in the CRR as against the 75 announced.
These are some of the significant aspects of this move:
Impact on liquidity
At present, the domestic economy is dealing with a situation of excess liquidity. Liquidity has gone up due to funds coming in from foreign investors.
This excess liquidity is one of the reasons for the higher inflation, and a hike in the CRR will help in drawing out some of the excess liquidity from the system, and hence in maintaining a balance.
Impact on inflation
The inflation rate has been rising sharply since the last few months. The main reasons that contribute to a higher inflation rate are higher prices of food articles, more liquidity in the system and the lower base effect of last year. This move by the RBI will not have much of an impact on the supply-driven food price inflation.
Also, nothing can be done about the lower base effect of last year. However, it will contain the price rise due to excess money in the system (demand pull inflation).
The RBI has also hiked its expected inflation target for the end of this fiscal year (March 2010) from 6.5 percent to 8.5 percent. This indicates that the RBI feels the CRR hike alone cannot control inflation completely. However, it will help in moderating it.
Impact on credit off-take
The credit off-take in the retail category was quite low. It has picked up slightly during the last couple of months due to the festival season and a number of attractive offers floated by banks.
The hike in the CRR will have some effect on credit growth. The RBI has lowered its credit growth forecast from 18 to 16 percent, in line with expectations.
Impact on interest rates
The hike in the CRR will leave less money with bank to lend. Therefore, indirectly, their cost of funds goes up and there is a case to increase the interest rates.
However, the lower credit offtake and excess liquidity in the system could work in favour of keeping the rates unchanged in the retail loan segment. Many banks have already announced that they will not increase the rates, and will maintain them at the current levels.
However, in the light of this CRR hike, the process of fresh lending is expected to further tighten, and interest rates may go up in the medium term, if certain parameters change further.
Indicators
In this monetary policy review, the RBI has given a clear signal that the domestic economy is back on the growth path. Hence the moves to reverse the expansionary policy stand, which was more-suited for the crisis kind of situation prevalent earlier.
The RBI has started the tightening in order to prevent the economy from overheating. The RBI has also revised its financial year 2011 GDP growth forecast upwards from six to 7.5 percent.
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