Reserve Bank hikes CRR by 50 bps to 6.5%....

In yet another measure to curb inflation, the Reserve Bank of India has hiked the cash reserve ratio, or CRR as well as the repo rates, reports CNBC-TV18. The hikes in repo rate by 25 bps to 7.75% will be effective immediately.

The banking regulator will hike CRR by 50 bps to 6.5% in two phases. The CRR will be raised to 6.25% from April 14, and from April 28, it will be raised to 6.5%. The State Bank of India will review the situation to hike rates and termed RBI's move as "taking out liquidity to curb inflation." It believes that the profitability of the banks will be impacted.

The apex bank hopes to drain the banks of Rs 15,500 cr via the CRR hike. The RBI has also cut interest rates on CRR balances to 0.5% vs 1%, which will be effective from April 14. The RBI calls the repo, CRR hikes in anticipation of liquidity conditions. The rationale behind the repo, CRR hike according to the RBI is to "contain inflationary expectations." The Finance Minister has indicated that the Central Government was supportive of the policy measures taken by the RBI and that the bank had consulted it before hiking the repo and CRR rates.

Reacting to the hike by RBI, the HDFC Bank's Ashish Vaidya predicts a sell-off in the bond markets on Monday. Meanwhile the SBI said that it will review rates after the RBI announces its decision. Arun Shandilya, DMD & CFO of SBI said that the bank will have to review rates because of the RBI decision. He further predicted the RBI move to hit profitability of banks. The largest public sector bank, SBI, also sees the current rate hike lilkely to impact credit growth. The pace of growth is also likely to suffer due to the capex planned by the industry. An ICICI Bank head sees upwards pressure on interest rates as a result of the RBI move; however, he added that it was too early to comment on the size and the time of the PLR hike.

K Raghuraman, Executive Director, Punjab National Bank feels, "We don't see any PLR hike in the near future, " but added that may do a review in the first week of April, the bank may take an overall look at the situation and take a call.