Quarterly Review of RBI Monetary Policy for 2007-08

[anju verma]

The Reserve Bank of India (RBI) in its first quarterly review of monetary policy for 2007-08 hiked the Cash Reserve Ratio (CRR) by 50 bps to 7% from 6.5% but left other benchmark interest rates unchanged. With inflation hovering with in its medium term target of 4.0-4.5%, the RBI pressed the pause button on any hike in key rates, barring the hike in CRR by 0.5% to suck out excess liquidity from the system. By the hike in CRR, the amount of depositors money commercial banks need to park with the RBI got increased. This will make a dip in banks' deposit interest rate. The exact quantum of dip in deposit interest rates is dependent on the Assets and Liability maturity pattern of the individual banks. Only Asset Liability Committee (ALCO) of individual banks can take decision on the same.
The central bank, in its quarterly review of monetary policy today, also removed the Rs. 3000 Crore cap on daily reverse repo transactions, the window through which it absorbs liquidity in a bid to check volatility in call money rates. This is seen as another move by RBI to absorb the excess liquidity from the market. This will also help to increase the call money rates, which is right now as low as Zero percent. Absorbing of liquidity will have wide ranging impact on the banks, they will be left with lower funds available for disbursal to borrowers. The impact of CRR hike is not direct on the lending rates and no bank is in a mood to reduce its Prime Lending Rate (PLR). Hence, the banks' margins are likely to come under pressure.

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