RBI has launched a full out war on inflation. It has raised CRR to 6.5% (from 6%) and Repo rate to 7.75% (from 7.50%). The interest on CRR has been halved to 0.5%. This will hit the banks on two fronts – the banks will be forced to keep more resources with the RBI in the form of CRR (almost to the tune of 16000 crores) and the money so kept will earn lesser interest also. The drop in the CRR rate is likely to shave off Rs.2000 crores from the banks bottomline. In addition to the above move the RBI will mop up a further Rs.6000 crores through the market stabilisation scheme. The above steps would make the cost of funds for the banks to go up which would force them to increase the lending rates.

It is widely perceived that an unbridled growth in M3 is the cause of such inflation. Reacting to the news the call rates shot up to 80% yesterday and the bond yields have gone up substantially. The 10 year benchmark government securities was being dealt at slightly less than 8% and the chances are that on Monday it will rise further. The fall happening on the last trading day of the fiscal is likely to have an impact on the balance sheet of most of the banks as they will have to make higher provision for depreciation in their bond portfolio.

The scenario for the first half of the next fiscal also doesnt seem to be too bright – In the first half the government will raise Rs.92,000 crores via issue of government bonds out of which more than 20000 crores will be through issue of bonds with maturity of more than 20 years

The rupee dollar front also seems to be witnessing high volatility with rupee touching 43.78 to a dollar before settling down to 43.45 at the close yesterday. This surge in rupee in the last week is sure to knock off the pants of exporters for whom such a move is a direct hit on their bottom line.

On the corporate front, we might witness a surge of corporates borrowing abroad in foreign currency to access cheaper funds. This will no doubt add to the already swelling forex kitty which is expected to touch 200 bn $

Be ready for further hikes in the interest rates in the near future!!!!

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