After the recent hike, the answer is a sureshot ‘No’!
“Congratulations!
It’s a CRR hike! It’s a... What?!? What was it you said?!! A hike?!??! You must be joking!!!” Actually Mr. Governor, we weren’t prepared for it. For that matter, we don’t think even anybody else was. Think about it – the first hike came in February; the second in April; and now, in the month of August, it’s the third one in the current year! Well, surprises fail to die and the unobvious continue to live on.
The plot in the above paragraph is from the documentary titled “The First Quarter Review of the Annual Monetary Policy 2007-08” that was showcased at RBI, Fort Road, Mumbai on July 31, 2007. For those who missed the show, here is a quick recap. The economy and the banking duo have had trouble dealing with ‘excess liquidity’ sloshing around the system. Amidst the fear that this excess liquidity in the system was leading to inflation, the RBI, in its intention to tame inflation within the range 4-4.5%, increased the CRR (Cash Reserve Ratio, for the uninitiated, is that part of customers’ deposit that banks set aside as cash with RBI) by 50 basis points. The CRR imposes a cost on the banking system. This is because banks do not receive more than 6.5% interest on the CRR from the RBI, while they clearly earn higher returns if the money is lent to customers or invested in bonds.
Ergo, the move announced will absorb another killing Rs.160 billion from the market. But coming back to the question, what should you do if you have some extra cash, or even if you wish to avail loans? Should you wait for some more time or move ahead? For the answer, one needs to understand that the CRR hike would necessarily have a harsh impact on individuals; for to them it implies paying up more interest on the loans – a movement that is inevitable in the coming few weeks. Strangely, banks have even started bringing down their deposit rates, and that is because though credit growth is slowing, they have enough money to lend. So even getting less interest on the deposits you might think of making is a real possibility.
Ashutosh Sharma, Executive Director, Central Bank, predicts to B&E, “Lending rates might remain constant for some time. The banks might cut deposit rates due to RBI’s CRR hike.” Predictably, State Bank of India, Canara Bank, Bank of Baroda, Bank of India & Union Bank have reduced the interest rates on one year deposits to 9% (from the earlier 9.5%); Allahabad Bank, Indian Bank & Punjab National Bank had already slashed their deposit rates prior to the CRR hike. But one interesting facet of this whole episode is that after this hike, though banks are surely in no mood to cut their lending rates (at least in the medium term), they would not increase it either, for it directly affects the consumer’s repayment capacity. Nevertheless, it’s a flat prognosis for new home buyers, who were hoping for rates to soft en a little before taking the plunge.
This could perhaps be the best description of what is better known as a double whammy. But worse could be around the corner; and that could be the stock markets crashing. With domestic money moving out of equity, a considerable amount could find its way back into productive use within the banking system; thus once again increasing the already excess liquidity within the system (some estimates currently put that ‘excess’ at Rs.400 billion), a situation that could consequently further bring down the deposit rates. And worryingly, that could even force RBI to again push for a CRR increase!
So, what do you do now? Would you still wait and watch? Don’t ask us, we’re already on our way to the bank!
B&E research: Gyanendra Kashyap
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2007
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
“Congratulations!
It’s a CRR hike! It’s a... What?!? What was it you said?!! A hike?!??! You must be joking!!!” Actually Mr. Governor, we weren’t prepared for it. For that matter, we don’t think even anybody else was. Think about it – the first hike came in February; the second in April; and now, in the month of August, it’s the third one in the current year! Well, surprises fail to die and the unobvious continue to live on.The plot in the above paragraph is from the documentary titled “The First Quarter Review of the Annual Monetary Policy 2007-08” that was showcased at RBI, Fort Road, Mumbai on July 31, 2007. For those who missed the show, here is a quick recap. The economy and the banking duo have had trouble dealing with ‘excess liquidity’ sloshing around the system. Amidst the fear that this excess liquidity in the system was leading to inflation, the RBI, in its intention to tame inflation within the range 4-4.5%, increased the CRR (Cash Reserve Ratio, for the uninitiated, is that part of customers’ deposit that banks set aside as cash with RBI) by 50 basis points. The CRR imposes a cost on the banking system. This is because banks do not receive more than 6.5% interest on the CRR from the RBI, while they clearly earn higher returns if the money is lent to customers or invested in bonds.
Ergo, the move announced will absorb another killing Rs.160 billion from the market. But coming back to the question, what should you do if you have some extra cash, or even if you wish to avail loans? Should you wait for some more time or move ahead? For the answer, one needs to understand that the CRR hike would necessarily have a harsh impact on individuals; for to them it implies paying up more interest on the loans – a movement that is inevitable in the coming few weeks. Strangely, banks have even started bringing down their deposit rates, and that is because though credit growth is slowing, they have enough money to lend. So even getting less interest on the deposits you might think of making is a real possibility.
Ashutosh Sharma, Executive Director, Central Bank, predicts to B&E, “Lending rates might remain constant for some time. The banks might cut deposit rates due to RBI’s CRR hike.” Predictably, State Bank of India, Canara Bank, Bank of Baroda, Bank of India & Union Bank have reduced the interest rates on one year deposits to 9% (from the earlier 9.5%); Allahabad Bank, Indian Bank & Punjab National Bank had already slashed their deposit rates prior to the CRR hike. But one interesting facet of this whole episode is that after this hike, though banks are surely in no mood to cut their lending rates (at least in the medium term), they would not increase it either, for it directly affects the consumer’s repayment capacity. Nevertheless, it’s a flat prognosis for new home buyers, who were hoping for rates to soft en a little before taking the plunge.
This could perhaps be the best description of what is better known as a double whammy. But worse could be around the corner; and that could be the stock markets crashing. With domestic money moving out of equity, a considerable amount could find its way back into productive use within the banking system; thus once again increasing the already excess liquidity within the system (some estimates currently put that ‘excess’ at Rs.400 billion), a situation that could consequently further bring down the deposit rates. And worryingly, that could even force RBI to again push for a CRR increase!
So, what do you do now? Would you still wait and watch? Don’t ask us, we’re already on our way to the bank!
B&E research: Gyanendra Kashyap
For Complete IIPM Article, Click on IIPM Article
Source : IIPM Editorial, 2007
An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative
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