MUMBAI, Dec 2: The Reserve Bank of India's decision to hike the cash reserve ratio (CRR) by 50 basis points to 10 per cent will suck out Rs 2,400 crore from the banking system. As the RBI has already shelved the revised plan to bring down the CRR to 8 per cent by April next year, there is a fear that interest rates are bound to move up in the coming days.

``The short-term interest rates are bound to go up and I think the call rates will test the crucial 9 per cent mark,'' PH Ravikumar, executive vice president of ICICI Bank, said. Coupled with the raise in CRR (portion of deposits to be maintained by banks with the RBI), an advance tax outflow is expected on December 15 which will add further pressure on the call money rates.

In the forward dollar segment of the forex market, six month forward rates reacted to the RBI measure and it hardened to 7.6 per cent from 7.44 per cent yesterday. ``The forward rates are aligning themselves with the interest rates,'' V Ravikumar of ABN Amro Bank said.

The Reserve Bank has been progressively bringing down CRR in a phased manner in 1997. On January 4 the apex bank cut the rate to 10.5 per cent from 11 per cent, followed by another cut on January 18 to bring in down to 10 per cent in accordance with the recommendations of the Narasimham Committee.In the busy season credit policy another round of CRR cut was announced.

Consequently, the CRR was brought down by 25 basis points to 9.75 per cent on October 25, followed by another 25 basis points cut to 9.50 per cent on November 22. The plan was to bring it down to 8 per cent by March 1998 and infuse Rs 9,800 crore into the system. One of the recommendations of the Tarapore Committee on Capital Account Convertibility (CAC) was to bring down CRR to 8 per cent by March 1998 as a necessary precondition to the full float of rupee.

The reign of volatility in the forex market is set to be over with the Reserve Bank's decision to ban booking of forward cover by banks for corporates based on past performance and declarations. ``It will put an end to all the cancellation and booking forward contracts by speculators, Ravikumar of ICICI Bank said. ``The freedom has been misused to a certain degree but the RBI has taken a step backwards,'' said another dealer, adding that the measure will increase administrative hassles it will increase bureaucracy. "Importers will stand to lose a lot of money," he said.

Jalan, however, said the decision to raise the CRR will not have any impact on the CAC schedule. Defending the RBI decision he said, ``You can call it a retrograde step. But I am not apologetic about it. We will go to any extent to bring back order in the market.'' He also made it a point that this is a temporary measure which can be revised either way. ``We can relax it or make it tougher depending on the market behaviour,'' he said.

The RBI statement says that the CRR on NDTL has been hiked to 10 per cent from the fortnight beginning December 6. ``The schedule of reductions in CRR already announced is kept in abeyance,'' the press statement says. Gilt prices reacted to this measure and yields of both the 14 day treasury bills and the 91 day treasury bills are expected to go up.

The RBI has already fixed the three day repo rate at 5 per cent which clearly indicates that call rates will remain above 5 per cent.How rupee behaved

MUMBAI: The fresh set of RBI measures - the third in the series in as many days - propped up the rupee on Tuesday after it touched a new low of 39.90/95 against the dollar. Not to be outdone, gilt prices reacted sharply with prices of long and medium-term securities falling by one rupee. The Indian unit staged a spectacular rally during the day to close at 39.30 - the level at which it closed on Monday.

The rupee opened at 39.30/35 and lost ground steadily to touch 39.90/95 in early morning trades. At this point, the news spread in the market that the Reserve Bank of India will announce a series of "drastic measures" to curb the increasing volatility.

Exporters were quick to react and began selling dollars which saw the rupee rally to as high as 39.10 level. However, sustained corporate demand saw the rupee weaken slightly to touch 39.25/35. "The rupee maintained such a level for the rest of the day," a dealer in a private bank said. "This level will be a very important one," a chief treasurer in a European based bank said.

Experts divided

MUMBAI: Bankers, economists and the industry are divided on the impact of Reserve Bank of India's measures. While some feel that the interest rates are bound to move northwards following the hike in CRR, others say there is sufficient liquidity in the system.

Economists generally flayed the RBI move to hike CRR. SS Bhide of the National Council of Applied Economic Research (NCAER), said that CRR increase at this juncture "would not be favourable for investment activity." He argued that interest rates would not soften, as was generally expected, "to the extent of increase in CRR rates."

The Federation of Indian Chambers of Commerce and Industry (FICCI) felt that the increase in CRR would have an adverse impact on the economy in the long run and felt that the situation should be monitored on a day to day basis, and withdrawn once the exchange rate is back on the rail. A T Pannir Selvam, CMD, Union Bank of India and chairman of Indian Banks' Association said the RBI is justified in taking these measures to check speculation in forex market.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.