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Hike in PLR: Negative repercussions - Views on News from Equitymaster
 
 
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  • Aug 3, 2000

    Hike in PLR: Negative repercussions

    To attack the fall in the rupee, Reserve Bank of India (RBI) on July 21, 2000 has hiked the cash reserve ratio (CRR) by 50 basis points to 8.5%. The bank rate has been increased by 100 basis points to 8%. The central bank also reduced limits available to banks for refinance facilities by 50%.

    The RBI’s move was aimed at stemming the fall in rupee by raising interest rates, which would have the effect of reducing the liquidity in the banking system. But the rupee has continued to drift downwards.

    The fall in the rupee could be disruptive for loan repayment of companies. Those company which have substantial overseas borrowings and unhedged position will be hit maximum. However the slide in the rupee to a certain extent helps net exporters and domestic companies which are facing strong competition from importers.

    ICICI Bank became the first domestic commercial bank to raise the lending rates in response to RBI’s monetary measures. The bank has hiked its prime lending rates (PLR) across all maturities by 50 to 75 basis points. However the bank has left its deposit rates unchanged. India’s largest housing finance company HDFC has also joined the bandwagon and India’s largest public sector bank, SBI, is expected to hike the rates.

    The hike in PLRs will increase the interest cost of the corporates resulting in pressure on their net profits. The high interest rate also lowers the industrial growth. It results in substituting equity for debt by Indian firms. This will eventually erode the shareholder’s value and makes the restructuring of the company difficult.

     

     

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