The Telegraph
Since 1st March, 1999
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RBI bid to squeeze out cash
- Rate hike to hurt industry

Mumbai, March 30: India Inc — which has ratcheted industrial growth to over 11 per cent this year — will almost certainly feel the pain from the monetary tightening measures that the Reserve Bank announced today.

The triple whammy — increase in the cash reserve ratio (CRR), repo rate rise and a cut in the interest on CRR deposits — will prompt banks to hike their prime lending rate (PLRs).

Many highly rated corporate houses, who had the privilege of borrowing at interest rates below a bank's PLR, could also be impacted as sub-PLR lending rates may soon disappear.

The perception is that industry — particularly those companies which have drawn up massive capital expenditure plans — will be among the worst hit as they could find it both harder and costlier to raise funds.

Analysts say the net impact of RBI move to control liquidity will be felt in non-food credit, which has been growing unbridled at over 30 per cent. While this is forecast to come down, the ensuing liquidity situation from the CRR hike could “cool down” the economy, which has been growing at over 9 per cent as well.

The RBI today announced that CRR will be increased by 50 basis points to 6.50 per cent in two phases. The first 25-basis-point hike will be effective from April 14 and the second from April 28. RBI also hiked the repo rate by 25 basis points to 7.75 per cent.

Bankers surprised

Bankers, who were caught unawares by the central bank's decision, said it has been taken on account of various factors. “The RBI’s primary goal is price stability. When inflation is ruling firm at around 6.50 per cent for three consecutive weeks, credit growth is not slowing and the money supply growth is well above its own estimates, it had to take this decision,” says Rupa Rege Nitsure, chief economist with Bank of Baroda (BoB).

The hike in both CRR and the repo rate comes only days after the banking system saw a huge pressure on liquidity due to advance tax outflows, which sent inter-bank call money rates to historic highs. Bankers, however, feel that this phenomenon is only temporary.

Explaining the reasons for the rate hike, RBI said even as year-on-year inflation has ruled around 6.5 per cent for the third week in succession, the growth in non-food bank credit of banks was 29.5 per cent as on March 16, 2007 against 32.7 per cent a year ago. Moreover, money supply growth up to March 16, 2007 was 22.0 per cent against 16.9 per cent a year ago.

Non-food credit

With nearly Rs 15,500 crore of bank resources being absorbed due to the CRR hike and bank borrowing becoming more expensive due to the increase in repo rate, senior bankers state that non-food credit growth, particularly to non-productive sectors, could slow down.

“Credit growth to non-productive sectors such as commercial real estate, personal loans or funding that third home could slow down or interest rates for these categories could rise. On the other hand, sub-PLR rates are likely to be immediately reviewed,” says Andhra Bank chairman K. Ramakrishnan.

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