RBI hikes CRR to stem rupee fall - Views on News from Equitymaster

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RBI hikes CRR to stem rupee fall

Jul 21, 2000

The Reserve Bank of India (RBI) on Friday sent out the strongest possible signal for an upward movement in interest rates across the spectrum by hiking the cash reserve ratio (CRR) by 50 basis points and benchmark bank rate by 100 basis points. The 50 basis point cut is expected to suck out over Rs 3,800 crore from the banking system. The central bank has taken such a drastic measure to stem further fall in rupee against dollar. It had the desired impact on the forex market as a few quotes were available at 44.70/75 against the dollar as compared to the intraday high of 45.05 against the dollar. The rupee is expected to open between 44.70/75 against the dollar on Monday. According to forex market sources, the rupee was quoted at 44.70/72 against dollar after the rate cut announcement however not many deals took place at that level.

The move will have an adverse impact on the government's borrowing programme for the current fiscal. The centre has so far only managed to raise 35% of its targeted borrowing for the current fiscal.

"This is an unexpected move. It is a cause for concern since the RBI had reduced interest rates a few months ago. This does not spell good news for the stock market," said a forex dealer from a foreign bank.

The RBI, in a statement issued after the forex market closed, hiked the bank rate to eight percent from seven with immediate effect. It also tightened liquidity by raising the cash reserve ratio by 50 basis points. "The action was in response to developments in international and domestic markets, and the foreign exchange market," said the RBI statement.

The central bank has hiked CRR in two stages effective from July 29 and August 12 respectively to 8.50%. The bank rate has been raised to 8% (7%) with effect from July 21. RBI has also reduced the refinance available to banks under the collateralised lending facility by 50% of their eligible limits in two stages. This would come into effect in two stages of 25% each effective from July 29 and August 12.

The rupee, which dipped to an intra-day low of 45.075 per dollar, finally closed at 45.025/03 per dollar today. Heavy corporate demand for dollars coupled with foreign institutional investors making heavy sales in the Indian capital markets are cited as the reasons for this fall in the rupee.

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