RBI Hikes CRR by 50 basis Points

On Friday, RBI increased the mandatory Cash Reserve Ratio (CRR) of the banks by 50 basis points. This implies that banks should increase their cash holdings by a tune of Rs 13,500 crores. This will imply that less money will be available for loan disbursement by the banks - thus reducing liquidity in the market. The move is aimed to lower inflation rates to below 5% target. Current inflation in India is around 5.3% - which is above the government mandated target of 5%.

Impact on investors
Banks are likely to offer higher interests on deposits by 0.5% and there will be corresponding increase on interest rates charged on the loans. Also the net amount of money given out as loans for the subsequent periods will reduce - thus forcing banks to avoid lending to sub-prime borrowers.

An increase at this juncture will have a direct impact on real estate prices. With the interest rate increasing, the increase in the asset value will slow down.