Faced with huge foreign capital inflows, the Reserve Bank of India (RBI) continued with its hawkish vigil on the banking system. Continuing its tight monetary policy regime, it hiked the cash reserve ratio (CRR) — the portion of bank deposits to be kept with the RBI — by half a percentage point to 7 per cent to suck excess liquidity out of the banking system.

With inflation falling below the 5 per cent level, the RBI, in its first quarter review of monetary policy, kept benchmark interest rates like the repo rate (the rate at which RBI lends funds) and reverse repo rates (the rate at which the RBI absorbs excess funds) steady at 7.75 per cent and 6 per cent respectively. It had hiked these rates five times since June last year, leading to an across-the-board rise in interest rates in the last one year. While lending rates will remain steady, the move is likely to lead to a fall in deposit rates as bank profitability will come under pressure. Three banks — Bank of India, Canara Bank and Bank of Baroda — cut rates on one-year deposits within hours.

The CRR hike will impound Rs 16,000 crore of lendable resources of banks, mainly infused by RBI’s intervention in the foreign exchange market while mopping up the dollars coming into the system. The central bank also removed the Rs 3,000 crore limit on reverse repo lending — for liquidity absorption — putting further upward pressure on short-term interest rates.

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