Bankers are expecting Reserve Bank of India governor Duvvuri Subbarao will cut the cash reserve ratio (CRR) by at least 50 basis points next month — and provide further force to the economic incentive package that the government and the central bank paved over the weekend.
Earlier on Saturday, Subbarao informed there is enough cash swilling about in the financial system in a clear justification for keeping hold on the CRR at 5.5 per cent. The CRR is that portion of deposits that banks must maintain with the RBI. A cut in this reserve ratio directly instill liquidity into the system.
According to the central bank sources it will be reviewing its credit and monetary policy in the middle of January.
Banking industry was hugely disappointed as the RBI hadn’t cut the cash reserve ratio, which would have given banks more cash to lend to firms.
“Ample liquidity was one of the key factors why the RBI did not reduce the CRR. However, it could cut it by 50 basis points next month to ensure that cheap funds are available to banks for lending,” said a senior official with a private sector bank.
Industry mavens had cried out in distress after the RBI failed to cut the CRR once again. Although between October and November this year, the central bank had reduced the reserve ratio by 350 basis points to 5.5 per cent. Some of the monetary measures were attached with it, this had injected close to Rs 300,000 crore into the financial system.
Pressure to cut the CRR has already started to mounting. Industry forum Ficci has advised the RBI to cut the reserve ratio to the 2004 level of 4.5 per cent. It also wanted the RBI to bring down the statutory liquidity ratio, which is now hanging at 24 per cent.
The SLR determines how much of the total deposits banks must invest in approved securities such as government bonds.
Last week, the central bank had cut down the short-term lending and borrowing rates — the repo and the reverse repo, respectively — by 100 basis points each and the government followed it by a pump-priming strategy intended to encourage industrial growth, which has shown signs of sputtering.
A section of the bankers are of view that the CRR cut is not required now as the financial system is having a surplus liquidity of over Rs 56,000 crore. On the other hand the RBI governor had informed the liquidity adjustment facility — through which the central bank manages the level of funds within the system — is in absorption mode.
Banks have not reacted with enthusiasm to the cut in the benchmark rates. Only Yes Bank, HDFC Bank and Union Bank have announced cuts in their prime lending rates that prop up their rate tables.
Bankers say that the cost of funds for banks remains high. Therefore banks have not cut down their deposit rates either; both rates will have to move in tandem.
