The Hindu : Business : RBI hikes CRR by 50 basis points

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Wednesday, Oct 31, 2007
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RBI hikes CRR by 50 basis points

Special Correspondent

To suck out Rs. 16,000 cr. from the system

— PHOTO: PTI

CALCULATED MOVE: Y. V. Reddy, RBI Governor, addressing bank officials while announcing the mid-year review of Monetary Policy in Mumbai on Tuesday.

MUMBAI: The Reserve Bank of India on Tuesday aired its concerns over the capital flows to real estate and equity markets and further tightened the flow of money by raising the cash reserve ratio (CRR) by 50 basis points to 7.5 per cent, which is expected to suck out around Rs. 16,000 crore from the system. The increase in CRR would be effective from November 10.

However, there is no change in its indicative short-term and long-term interest rates. The CRR is the percentage of bank deposits which are parked with the RBI as reserve. No change in short-term and long-term rates, also an indication to bankers that no funds will be available at a cheaper rate. The markets were expecting a rate cut considering that the RBI would take a position by aligning itself with the U.S. Federal Reserve, which has been the most aggressive in terms of easing monetary policy, with a higher than expected rate cut.

“At the current juncture, the biggest challenge is the management of capital flows and the attendant implications for liquidity and overall stability,” said Y. V. Reddy while addressing a press conference to announce the mid-term review of its annual policy. “The escalated level of prices of real estate, role of private foreign equity and non-bank financial companies, and the still strong pace of growth in bank lending to the sector is a cause of concern,” Dr. Reddy added.

“In our context of stability, banks balance sheet should not be over exposed to such assets like real estate and stocks. Sizable off-balance sheet exposures of select banks could pose some risks in a few cases. We are sensitive to these issues… as asset prices are elevated and not moderated,” said Dr. Reddy.

As set out in the annual policy in April last, the RBI placed the Gross Domestic Product (GDP) at 8.5 per cent and the inflation target close to 5 per cent for the current financial year. According to Dr. Reddy over the next twelve to eighteen months, risks to inflation and inflation expectations would also continue to demand priority in policy monitoring

Housing finance

The RBI Governor also raised the issue of interest rates on housing finance, especially on enhancement of monthly instalments by some banks, with the bank chiefs, when he met them to review the policy. Even if they are correct technically, “I asked them to justify this revision,” said Dr. Reddy, adding that, they should respect their contract with customers.

“We do not want to enter into micro regulation. But the context should be fair and enforcement also should be fair.”

The RBI Governor also said that the central bank would issue a circular which would ask banks not to charge customers a fee for closing their accounts with banks. In a quick response to a question at the press conference, Dr. Reddy said, “No charge should be levied for closure of accounts.”

The RBI also pointed out to the bankers that no force should be used to recover the funds from the customers, by using recovery agents.

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