The Reserve Bank of India, which has already raised the cash reserve ratio (CRR) thrice since December last year, is contemplating another hike, though only on incremental deposits this time.
There is a buzz in the market that the decision can come on Saturday. Sources in the banking system, confirming that a hike was definitely an option, said the decision could come on Saturday or later.
CRR is the percentage of deposits that banks are required to keep with the RBI.
According to the sources, banks may have to maintain an increased CRR on additional deposits garnered since April 1. Bank deposits have increased by Rs 11,218 crore to Rs 26,86,813 crore since April 1.
Deposits taken earlier will attract only the existing rate of 6.5 per cent.
Significantly, as much as Rs 20,660 crore is expected to flow into the system due to the maturing of a government bond -- 7 per cent, 2007 -- on May 28. Moreover, institutional inflows into the equity market are also expected to be strong.
The option of increasing the CRR on incremental deposits is being mulled since banks have been demanding compensation from the RBI in the form of interest on cash collected through CRR.
There is a precedent for use of incremental CRR. In the late 1990s, a 10 per cent incremental CRR was imposed on deposits by non-resident Indians to regulate the flow of funds from overseas.
The other option being considered to absorb liquidity is auction of market stabilisation bonds for a higher amount of Rs 10,000-15,000 crore, against the usual issue size of Rs 2,000-6,000 crore.
However, the CRR hike on incremental deposits is finding favour because it is a one-time measure, whereas market stabilisation bonds are an expensive proposition and require the government to pay an interest on dated security at market-determined rates.
According to sources, the recent clampdown on external commercial borrowings will also help check the flow of dollars, but the RBI is particularly concerned about absorbing excess liquidity since it has lowered the inflation target from 5-5.5 per cent to 4-4.5 per cent for 2007-08.
Rs 1 crore = Rs 10 million; 1 US$ = Rs 40.60
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