RBI may Increase CRR

RBI is expect­ed to increase CRR next month to sig­nal a rate increase. In what could be the first sign of a rise in inter­est rates, bulk deposit rates have start­ed ris­ing. Deposits of over Rs 5 crore are usu­al­ly clas­si­fied as bulk deposits. At least three banks – Union Bank of India, Uco Bank and Ori­en­tal Bank of Com­merce (OBC) – have increased the rate on one-year bulk deposits. Accord­ing to mar­ket par­tic­i­pants, as against 5–5.50 per cent last month, these banks have begun to offer 6.25–6.35 per cent on these deposits.

When the finan­cial cri­sis inten­si­fied after the Lehman Broth­ers’ col­lapse, the Indi­an Banks’ Asso­ci­a­tion advised banks not to quote bulk deposit rates beyond 6 per cent. In recent months, with low cred­it off-take and high liq­uid­i­ty, bulk deposit rates had dropped below those on retail deposits, which are also seen to be more sticky.

The mar­ket expects the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR), or the pro­por­tion of deposits that they set aside, next month to sig­nal a rate increase. A high­er CRR would result in liq­uid­i­ty tightening.

In addi­tion to bulk deposits, even the rates on cer­tifi­cates of deposits have also gone up dur­ing the last fortnight.

The upward trend is reflect­ed in short­er matu­ri­ties, too. On Mon­day, Uco Bank placed Rs 400 crore of three-month CDs at 4 per cent while Canara Bank placed five-month CDs at 3.92 per cent. The rate on three-month CDs has moved up to 4 per cent from 3.15–3.45 per cent at the end of Novem­ber, accord­ing to dealers.

Although some bankers said the north­ward move­ment was due to the usu­al quar­ter-end rush by banks to meet their tar­gets and improve the top line, a sec­tion of bankers believe the increase in rates may be per­ma­nent. Bankers said they did not want to be caught off guard once RBI raised rates and cred­it growth picked up in the next quar­ter. In recent weeks, CD issues have increased. Deal­ers said that so far in Decem­ber banks had raised close to Rs 25,000 crore through the route against Rs 15,000 crore in November.

The liq­uid­i­ty posi­tion has changed, with the amount of sur­plus funds that the banks parked with RBI through the reverse repo win­dow below the Rs 40,000 crore-mark now, as against Rs 90,000 crore a week ago.

Rates will cer­tain­ly move up in Jan­u­ary. So it is bet­ter to hedge now against any sharp move­ment as a result of the cen­tral bank’s action,” said the head of lia­bil­i­ties at a gov­ern­ment bank.

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