In a surprise move late Wednesday, the Reserve Bank of India (RBI) announced a fresh liquidity tightening measure aimed at curbing inflationary pressures caused by rising food and fuel prices.
The RBI increased the Cash Reserve Ratio (CRR) for select banks by 50 basis points, withdrawing around ₹1.2 lakh crore from the system. This move sent banking stocks into a tailspin on Thursday, as the tightened liquidity is expected to squeeze margins and loan growth.
Experts say the move indicates the RBI’s discomfort with rising CPI inflation, which breached 6.3% in June, well above the 6% upper tolerance band. With monsoon disruptions and supply bottlenecks continuing, the RBI seems focused on proactive tightening.
Short-term borrowing costs spiked in the interbank market, and bond yields rose in response to the announcement. While this may help anchor inflation expectations, it could also lead to slower credit growth and dampen consumer sentiment in the near term.
Investors are advised to brace for more such steps if inflation remains stubborn. All eyes are now on the RBI’s August monetary policy, which could bring further surprises.