In a move aimed at tightening liquidity conditions further, the Reserve Bank of India (RBI), on Tuesday, raised banks’ reserve requirements to absorb inflation-fuelling excess cash stemming from capital inflows.

Wiping out expectations of a rate cut, the RBI opted to step up the cash reserve ratio (CRR) by 0.50 per cent to 7.5 per cent, while making no changes in other key interest rates. CRR is the amount of cash banks need to park with RBI which do not earn interest.

This is the sixth time RBI has increased CRR in 2007 and the present hike is expected to drain over another Rs 15,000 crore from the system. “Financial markets continue to experience conditions of surplus liquidity, warranting an appropriate response to ensure orderly market conditions on an enduring basis,” the RBI said in its policy review.  RBI kept its key repo rate at 7.75 per cent as expected.

Growth forecast

It left its growth forecast for fiscal year ending March 2008 unchanged at 8.5 per cent.  It has left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged also at 6.0 per cent.

The bank rate, which is used to price medium-and long-term loans, remained at 6.0 per cent.

Briefing post-policy review press meet here, RBI Governor Y V Reddy said a status quo on monetary policy would continue. On participatory notes, he said “Our approach, our stand with regards to participatory notes is still valid and that they are not desirable.” 

Wait ‘n watch

Majority bankers feel that the hike in CRR could be absorbed and interest rates may not change. “SBI will not change any rates for the time being, and whether interest rates will come down or go up is for individual banks to decide,” State Bank of India Chairman & Managing Director O P Bhatt told reporters here.

ICICI Bank Joint Managing Director Chanda Kochhar too felt that this amount of CRR hike could be absorbed.

There may be some pressure on margins, but interest rates may not change.