Interest rates are not expected to go up immediately even as the Reserve Bank of India on Tuesday announced a fresh 25-basis-point hike in the cash reserve ratio (CRR), the amount of cash banks must keep with the central bank, in its Annual Policy Statement for 2008-09.
This is the second time in two weeks that the central bank has asked banks to set aside more reserves. The impact is, however, expected to be marginal as bankers talked about keeping lending rates stable for the time being due to sufficient liquidity in the system.
While public sector bank chiefs are awaiting cues from Finance Minister P Chidambaram on Thursday, other bankers pointed out that the full impact of the 75 basis point rise in CRR -- including the one announced on Tuesday -- will be felt by May 24, when the latest hike kicks in.
While the 50-basis-point CRR increase, announced on April 17, is expected to suck out over Rs 18,000 crore (Rs 180 billion) from the system, the fresh move will absorb around Rs 8,000 crore (Rs 80 billion).
The CRR increase is seen as an attempt to tame inflationary expectations and manage liquidity. The central bank has made it clear that the growth in money supply and the growth in credit and deposits should be moderated.
Besides, the RBI warned of possible pressure from inflows due to the changing global financial environment and the slowdown in developed markets.
The central bank's move to lower the risk weights on housing loans up to Rs 30 lakh (Rs 3 million), from Rs 20 lakh (Rs 2 million) earlier, is also going to have a limited impact, with private banks unlikely to pass on the benefit to end-users.
RBI Governor Y V Reddy told Business Standard that the move should not be seen as the central bank changing its stance. "We continue to be conservative. It is a concession in view of the large number of people affected. It is not indicative of a change in our stance with regard to prudential requirements for exposure to housing, real estate or capital markets," he said.
Interest rate movement is not linked to risk weights alone but also depends on the deposit rates and liquidity, explained a banker.
Reddy said the bank may have to take more measures to curb inflation that's near a three-year high while ensuring economic growth of at least 8 per cent. Raising borrowing costs from a six-year high may slow growth in Asia's third-largest economy to a four-year low, RBI said.