Banks welcome CRR hike, analysts sceptical

April 29th, 2008 - 5:59 pm ICT by admin  

Mumbai, April 29 (IANS) India’s leading banks have welcomed the central bank’s monetary policy announced Tuesday, terming it a balanced and progressive set of measures that aims to curb price rise and stimulate growth. “This policy is a move to curb inflation and spur growth. We as bankers need to follow the Reserve Bank of India (RBI) mandate,” said ICICI Bank Managing Director and Chief Executive K.V. Kamath.

He feels that the hike in cash reserve ratio (CRR) by 25 basis point will help suck out about $2 billion excess liquidity from the banking system. “But this will not impact the banking sector significantly.”

Punjab National Bank general manager for treasury operations Arun Kaul says: “It is premature to say right now what impact it will have, but increasing the CRR will tighten the money supply.”

Bank of India Chairman and Managing Director T.S. Narayanasami said the CRR hike was necessary to control inflation. “We expect a good fiscal as the forecast for growth is eight percent.”

He, however, feels there is no requirement to make changes in prime lending rates as there was sufficient liquidity in the market.

Yet, some analysts maintain that the hike in CRR - the minimum liquid funds that banks have to keep in reserve - will have a negative impact on banks as it would hurt their margins.

“We expect banks to increase lending rates gradually due to a cumulative 75 basis points increase in the CRR and further tightening measures ahead,” says Tushar Poddar, vice-president of Asia Economic Research Team at Goldman Sachs India.

He expects the current economic growth to slow to 7.8 percent while inflation is likely to remain at an average of 6.5 percent over the next six months, only coming down gradually to around five percent by March 2009.

Banking analyst with IDBI Capital Ravikant Bhat says the banks may take a call on deposit rates as the CRR hikes will hurt their margins. “Given the risks associated with increasing lending rates a deposit rate cut will make better sense for banks.”

He feels banks will also have to be cautious as low deposit rates two years back were not helping them grow their deposits and the incremental lending took place by foregoing their excess statutory liquidity ratio .

“It can be another year of margins remaining under pressure.”

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