Indian Governor of the Reserve Bank Shaktikant Das announced the decision after a three-day meeting. However, the RBI has not increased the policy rate. But banks have been asked to raise CRR (cash reverse repo) to pre-epidemic levels. This means that banks will have less liquidity. And it will be under pressure to raise interest rates. Experts say the move will save funds on hand for lending to banks. This will increase the interest rate on the loan. But on condition that he sees a strong demand to take a loan.
What is the decision of RBI
The RBI has announced that it is preparing to increase the CRR from 3% to 4% in the next four months. This increase in CRR will take place in two phases. The first phase will be increased to 3.5% from March 27, 2021. In the second phase, on May 22, 2021, the rate will be 4%. The CRR was at 4% between February 2013 and January 2020. The Reserve Bank wants to bring this level back to this level.
What is CRR
Some rules have been made for banks operating in India. This rule is made by RBI. Under the rules, the RBI has to invest some of its capital in the country’s public and private banks. This is called the Cash Reserve Ratio (CRR).
Experts say the RBI has made the rule so that a bank can refuse to pay if a large number of customers need to withdraw money. If the RBI CRR is high, banks will have to keep a large portion of their capital with the Reserve Bank of India. Banks operating in the country will then have less money to lend to the customer.
If the Reserve Bank lowers the CRR, the liquidity in the market increases. The RBI changes the CRR only when the liquidity in the market has to increase quickly. The RBI uses it as a tool to increase inflation in the country due to higher liquidity.
There will be a direct effect on FD recipients
Interest rates are likely to rise in the coming days after the RBI’s policy review. This can increase the tension for the borrower. But fixed deposits are good news for those who invest in FDs as interest rates on fixed deposits have been steadily declining for the past few months. Experts say that senior citizens suffer the most from interest rate cuts on FDs. Because they depend on this interest for their daily expenses.
Home, auto and personal loan rates may increase
Asif Iqbal, head of research at Escort Securities, said that if the CRR rises in the coming days, it will affect the liquidity of banks and funds. Among them, the bank can increase the interest on home, auto, personal, education loans.