By CardinalStone Research,
In its latest meeting, the Monetary Policy Committee (MPC) announced an increase in cash reserve ratio (CRR) from 22.5% to 27.5%, the first raise since March 2016. Of all the considerations given for the surprise adjustment, the need to combat liquidity-driven inflation was notable. The impact of the CRR increase is likely to be diametrically opposed to that of the loan-to-deposit ratio (LDR) measure already at play, in our view. Specifically, while the LDR measure is configured to induce bank lending, the CRR increase could curtail banks’ ability to achieve that objective with more funds likely to be sterilized
We see the following as broad implications of the policy move:
• Banks’ effective CRR may increase
• Banks’ liquidity could tighten, leading to a scramble for funds with negative consequence for funding cost
• Downside risks to banks’ earnings, but mild implications for valuations.