New Delhi: Any hopes of interest rates softening up in near future were doused by the Reserve Bank of India (RBI). In its mid-term review of the monetary policy, RBI has hiked the Cash Reserve Ratio (CRR) by 50 basis points. However, there was no change to key lending and borrowing rates.
By increasing the CRR, RBI is aiming to absorb the access liquidity in the banking system. Cash Reserve Ratio is the amount of cash, which the bank must hold with the RBI without any interest. The recent decline in interest rates on home loans and other retail loans by various banks were partly attributed to surplus funds available with the banks, with the increase in CRR this scenario will most likely change.
Banks were anticipating a decline in lending rates from RBI and accordingly they had offered festival discounts on their products until October 31. What happens to these discounts remains to be seen however, Chanda Kochar Joint MD, ICICI Bank said," CRR hike will stabilize liquidity and further hike in interest rates is unlikely."
Y V Reddy, RBI Governor gave strong indications of the bank's commitment towards providing price stability, credit quality and orderly conditions in the financial market. Containing inflation is one of the priorities of RBI and it wants it to be within the range of 4-4.5 percent.
With foreign investors pumping in huge amounts of money into the fast growing Indian economy, liquidity management has become a key concern for RBI and Government of India. The central bank said it will be in readiness to take recourse to all possible options for maintaining stability and the growth momentum in the economy in view of the unusual heightened global uncertainties, and the unconventional policy responses to the developments in financial markets.