Mumbai: Reserve Bank of India (RBI) should bring down the so-called statutory liquidity ratio (SLR), or the mandated buying of government bonds by banks, to allow room for private companies to borrow, governor D. Subbarao said on Tuesday.
Banks invest certain portion of their deposits in bonds that the government floats to bridge its fiscal deficit.
Last December, RBI cut SLR by one percentage point to 24% as it attempted to free cash in the banking system because the banks were borrowing, on average, Rs 1.04 trillion daily from the central bank to meet cash needs.
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“We should bring it down so that credit is available and the private sector is not crowded out,” Subbarao said at the National Finance Symposium organized by the Indian Institute of Foreign Trade.
However, he also added that Indian banks were protected from the impact of the global financial crisis because of high SLR that provided banks with enough liquidity cushion.
“It’s SLR which has protected us from the crisis because banks had liquidity. Basel III also has a provision that mimics SLR,” he said.
In the last three years, RBI has changed the SLR thrice, cutting it to 24% in November 2008 to help banks tide over an acute liquidity crunch following the collapse of US investment bank Lehman Brothers Holdings Inc. It restored SLR to 25% one year later as liquidity improved before cutting it again in December 2010. Under law, SLR can be pared to any level.
Economists say cutting SLR is probably the next phase of reforms for the central bank but it cannot be expected in a hurry.
“Right now there is no urgency to cut SLR because credit growth is slow, but, as credit picks up, more funds will have to be freed to allow banks lend to companies,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
Besides SLR, banks also have to keep 6% of their deposits with RBI as cash reserve ratio (CRR), on which banks do not earn any interest. CRR too can go down to any level.
Subbarao said RBI will also open up on the capital account side to allow free flow of money into and out of the country.
“We will open up capital account but slowly like the Latin phrase I always use, festina lente, which means make haste slowly,” he said, adding that there are arguments both for and against opening up on capital account.
Nitsure of Bank of Baroda argued there are more urgent issues than opening up capital account.
“The Tarapore committee had made some signposts for convertibility and two of those were inflation and fiscal deficit. Inflation problem is more acute than previously thought and fiscal deficit is still high,” she said.
RBI had appointed a six-member committee to lay a road map for capital account convertibility under the chairmanship of former RBI deputy governor S.S. Tarapore. The committee submitted its report in July 2006.
Inflation continues to be persistently high despite 11 interest rate increases by RBI since March 2010, from 3.25% to 8%.
India’s Wholesale Price Index rose by 9.22% in July 2011 from a year ago, marginally slower than June’s 9.44% rise, government data showed last month.
RBI expects inflation to ease to around 6% by end of March 2012, according to its monetary policy projections.