RBI has hiked CRR by 25 bps and repo rate by 50 bps recently.
In a move to curtail rising inflation and inflationary pressures, the Reserve Bank of India (RBI) on Tuesday tightened the liquidity in the system by raising the Cash Reserve Ratio (CRR) of banks by 25 basis points to 9 per cent and the short-term indicative rate (repo rate) by 50 basis points to 9 per cent.
The increase in CRR — the portion of deposits banks must keep aside — with effect from August 30 is expected to drain out another Rs. 9,000 crore from the banking system. Repo rate, rate at which the RBI lends money to banks, has been hiked by 50 bps.
The RBI undertook aggressive monetary tightening measures as the global pressure on inflation from primary commodities and crude prices are not expected to ease soon. The RBI had hiked the repo rate by 125 basis points and the CRR by 150 basis points since April.
RBI priorities
The RBI also revised the GDP growth projection for 2008-09 from 8.0-8.05 to around 8 per cent, barring domestic or external shocks. Pointing out that price stability and controlling inflation were the priorities of the central bank while it maintained growth momentum, RBI Governor Y.V. Reddy said, “Exaggerated bearishness is as dangerous as exaggerated bullishness. We are emphasising a lot on inflation but underplaying growth.” Dr. Reddy was addressing a press conference to announce the RBI’s first quarter review of the Annual Monetary Policy for 2008-09.
Controlling Inflation
While the policy actions would aim to bring down the “current intolerable level of inflation to a tolerable level of below 5 per cent as soon as possible and around 3 per cent over the medium term,” Dr. Reddy said that at this juncture a realistic policy endeavour would be to bring down inflation from 11-12 per cent to a level close to 7 per cent by March 31, 2009.
On domestic oil prices, the RBI Governor said, “We are not expecting any pass-through of global oil prices to domestic prices in the current financial year.”
How it affects the stock markets, investors and the common man?
These hikes are a clear signal for banks to increase their lending rates; and loans for housing, cars and personal purpose will be dearer.
Bank stocks suffer the most a lending and borrowing becomes dearer. Most rate sensitive sectors in the stock market are banking, real estate, autos. These suffer because loans become more expensive with higher EMI’s.
In other sectors the companies which are in expansion mode and need capital are going to suffer with credit availability becoming difficult |
