Though RBI has not raised the policy rate but increasing the CRR of banks to the same level as existed before the pandemic means that banks will have less liquidity. Consequently, there will be an upward pressure on interest rates. What it means is that banks will be left with less funds to lend and hence start increasing interest rates on loans if they find robust demand from the borrowers.
The RBI has announced that it will start raising the CRR rate from 3% to 4% within the next 4 months. This increase of CRR will happen in two phases. In the first phase the CRR will go up to 3.5% on March 27, 2021. In the second phase the rate will be increased to 4% on May 22, 2021.
CRR has remained at 4% level since February 2013 to January 2020 and now the central bank wants to restore it back to this long term level. This is a very critical sign that the RBI has given which first indicates that scope of any policy rate cut going forward is unlikely. Banks will take this as future direction and are unlikely to reduce interest rates going forward.
Before the pandemic hit, when CRR was at 4%, the highest fixed deposit rate in State Bank of India was at 6% in February 2020 which came down to 5.4% in May 2020 after CRR and repo rate were reduced.
However, any increase in interest rates may take some time because the system is flush with liquidity as of now. Huge government borrowing to the tune of Rs 8 lakh crore planned in next financial year is also expected to to keep excess liquidity in check. The central bank has also given indication that it may inject liquidity in the system if required. “CRR normalisation opens up space for variety of market operations of the RBI to inject additional liquidity” said Shaktikanta Das, Governor, RBI.