RBI raises CRR

The Reserve Bank of India (RBI) has increased the Cash Reserve Ratio (CRR) to 7% from the current CRR of 6.5%. This will curtail the liquidity in the market for sure. This happens in the back drop of China converting the non-tradable shares to tradable one to increase the liquidity in the market. So, exact opposite moves in the fastest growing economies of the world. What a surprise!!

Its clear now that the RBI is looking at bringing down the inflation rate in the economy by sucking out the liquidity in the market. The effect of this was seen immediately as the three major PSU banks – Bank of India, Bank of Baroda and Canara Bank cutting down their deposit rates.

How is it going to affect the Investors and Borrowers?

Investors

- Lower return on bank deposits
- Fixed deposit rates expected to remain un-changed
- Falling interest rates till next correction in debt market

I see the insurance sector to be the beneficiary of this since, they are considered to be next best safest investment opportunity. Further, they are providing higher rate of return compared to the bank deposits and the benefit of insurance.

Borrowers

- The home loan borrowers can expect the interest rates to stabilize at the current rates.
- The short term interest rates to rise sharply
- Retail loan segment might see a rise in interest rates

The interest rate will not come down immediately since, the main objective behind this is to curtail the liquidity in the market. So, for the existing borrowers it’s a sigh of relief that the interest may not go up further. For the new borrowers, you will have to wait and watch for some time.