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RBI CRR hikes to increase overnight rates

The Reserve Bank of India (RBI) hiked the cash reserve ratio (CRR) as it sought to lift overnight rates by sucking out some excess liquidity from the markets. Bankers and analysts said the CRR hike together with the repo rate hike will ensure that the overnight rates are closer to the repo rate.

CRR has been hiked to 4.5% from 4%, now taking it above the pre pandemic level when it was reduced to 3% as part of the central’s banks efforts to support the economy due to the pandemic and subsequently raised to 3.5% in 2021. In his statement governor Shaktikanta Das said the hike in CRR was to ensure, liquidity conditions are “modulated in line with the policy action.”

“Keeping with the stance of withdrawal of accommodation and in line with the earlier announcement of gradual withdrawal of liquidity over a multi-year time frame, it has been decided to increase the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent of net demand and time liabilities (NDTL), effective from the fortnight beginning May 21, 2022. The withdrawal of liquidity through this increase in the CRR would be of the order of ₹87,000 crore,” Das said.

Anubhuti Sahay, head south Asia economic research at Standard Chartered said the CRR hike will push overnight rates closer to the repo rate. “Although the RBI will closely watch yields, it has not announced any major steps to cap the rise in yields. We expect upward pressure on Indian government bond yields to persist and we stay negative on government bonds,” Sahay wrote in a note.

Average surplus liquidity in the banking system – reflected in total absorption through SDF and variable rate reverse repo (VRRR) auctions – amounted to Rs 7.5 lakh crore during April 8-29, 2022. Das said the CRR hike would correct the overnight rates. “The large liquidity overhang in the form of daily surplus funds parked under the SDF (average of Rs 2 lakh crore during April 8-29, 2022) has resulted in the weighted average call money rate (WACR) – the operating target of monetary policy – dipping below the SDF rate,” Das said.

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