Views | No time to cut CRR

Views | No time to cut CRR

The Reserve Bank of India (RBI) is under pressure from many quarters to pare banks’ cash reserve ratio (CRR) -- or the portion of deposits that commercial banks need to keep with the central bank -- to ease liquidity tightness in the financial system. Banks have been borrowing Rs1 trillion -- or even more some days -- from the RBI through its re-purchase or repo window and the cash deficit in the system will intensify in mid-December when Indian corporations will pay advance tax for the current quarter. Last raised in January 2010, the CRR is now pegged at 6%. Since there is no floor for the CRR, theoretically the RBI can bring it down it to any level. A one percentage point cut in the CRR will infuse about Rs56,500 crore in the system.

Indeed, the RBI has committed to keeping the cash deficit in the system at around 1% of bank deposits and the current deficit is far more than 1%, but that’s a prescription for normal time and not when the currency is under pressure and time is uncertain. The year-on-year credit growth till mid-November has fallen to 17.7%, sharply down from 22.8% in the year-ago period, and banks are not in desperate need of money to support their credit growth. To tide over their temporary liquidity mismatches, banks have enough leeway as they can borrow from the RBI through offering government bonds as collateral. Under banking law, they need to invest 24% of their deposits in government bonds -- known as statutory liquidity ratio, or SLR -- and any additional bond holding can be offered as collateral. Since the banking system’s SLR holding is about 29%, they can borrow up to 5% of their bond holdings or at least Rs2.8 trillion from the RBI at 8.5%. In addition to this, up to 1% of their SLR holding can be borrowed at a higher cost -- 9.5% -- under the so-called marginal standing facility. The CRR should not be cut and the RBI can also refrain from giving liquidity assurance to banks by announcing a calendar of its bond-buying programme as free money can encourage banks to punt on the currency.

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Tamal Bandyopadhyay keeps a close eye on all things banking from his perch asMint’s deputy managing editor in Mumbai.