Friday the 29th

R.B.I has increased the C.R.R by 75 basis points to 5.75%.This came as a huge surprise since most of the analysts dint expect the R.B.I to raise rates beyond 50 basis points.As mentioned in my previous post R.B.I has used C.R.R as a tool to suck liquidity and has left the repo rate unchanged.

Lets now analyze the impact of rate hikes on the economy.

1)Food Prices:-

The rate hikes should not bring about significant change to food prices since the rise in food prices has mainly been triggered due to supply side concerns.Only the agriculture minister can arrest the rising prises of these commodities,but irresponsible comments from the agri minister will only make the problem worse.

2)Banks:-

Due to the rise in liquidity the deposits have increased significantly,but the decrease in net interest margins of most of the banks in this quarters results signifies that they have found it difficult to increase lending due to decrease in demand.Hence the banks may not raise rates in the short term,but in the long run the increasing government borrowings due to high deficits may push the rates higher(The crowding out effect).

3)Real Estate:-

Price rise in real estate has been a cause of concern for some time now,but the central bank will find it difficult to arrest the prise rise in this sector as long as the banks start raising rates.

To conclude I would only say that nothing significant is going to happen until the banks start to raise rates.