Inflation war: RBI makes it costlier for banks to lend

MUMBAI, NEW DELHI, APRIL 17 The Reserve Bank of India carried forward the government’s war on Inflation by raising the cash reserve ratio (percentage of deposits banks have to keep with the RBI) by 50 basis points to 8% to suck out Rs 18,500 crore from the system. The move, that will put upward pressure on lending rates, comes as a blow to consumers who have borrowed money from banks in recent years.

RBI governor Y V Reddy chose to strike now instead of waiting 12 days when he was scheduled to present his annual review of the monetary policy. With the wholesale price index-based inflation rate hovering over what he called “unacceptable” levels of 7%, the Governor showed urgency in wielding his monetary stick to tame prices. Earlier, the Government had taken several fiscal measures like import duty cuts on edible oils and foodgrains to rein in prices.

“Any CRR hike will put upward pressure on interest rates,” said Prakash Subramanian, Managing Director (capital markets), Standard Chartered Bank. Besides this, the hike will also hit bank profits marginally since they will have to keep more money with the central bank at lower than market rates of interest.

If any rate hike is announced by banks, customers who have opted for floating rate home loans will find the EMIs (equated monthly installments) rising. Home loan rates have gone up by over 40% to 10.25-10.75% in the last two years, hitting home buyers hard.

The year-on-year WPI inflation, which was 3.83% on January 12, 2008 — at the time of the announcement of the third quarter review — increased to 7.41% on March 29 and remained at 7.14% as on April 5. “Its overall impact on inflation expectations requires to be monitored and moderated,” said a late-evening RBI statement announcing the CRR hike. The hike will come in two stages of 25 basis points each — April 26 and May 10.

This is the fifth time the RBI is hiking the CRR since December 2006. It last increased CRR by 50 basis points to 7.5% in October 2007 to curb liquidity. Inflation, then, was hovering around a five-year low of just over 3%.

Just a day before, Reddy had indicated the move. “We anticipated some inflationary pressure, but it turned out to be more than that. We have to see that the aggregate demand management is consistent with supply side initiatives,” he had said.

Though many bankers do not expect the RBI...

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Inflation war: RBI makes it costlier for banks to lend

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