Mumbai: Most bank chairmen have made a strong case for lower interest rates by asking for a cut in the cash reserve ratio and promising to pass on the benefits to borrower in their pre-policy meeting with the Reserve Bank of India on Friday. A CRR cut would add to lendable resources of banks and reduce their cost of funds thereby giving a downward push to interest rates.
Speaking to newspersons after the meeting, State Bank of India chairman Pratip Chaudhuri said that he had asked for a 150-basis point cut in CRR. In the meeting, RBI polled bankers on their views on what monetary measures it should take and most bankers had sought a cut in CRR. “We prefer a CRR cut rather than a repo rate cut,” K R Kamath, chairman, Indian Banks Association, and chief of Punjab National Bank said. He added that bankers have assured RBI that they would pass on the benefits of further rate cuts to borrowers. CRR is the percentage of deposits that banks have to park with RBI. This is both a prudential measure as well as a tool used by RBI to control liquidity.
Inflation, the key determinant for any rate cut, is expected to remain high because of the impact of a hike in diesel rates. However, two factors which RBI has been keeping close tabs on have turned positive. First, the government has gone on an overdrive on policy measures starting with an increase in fuel prices to keep the fiscal deficit under check. Second, the rupee has bounced back smartly to 51 levels from a low of over 57 a few months ago. With financial ministry officials talking about the local currency firming up to 50 levels, RBI may respond to finance minister P Chidambaram’s statement that the central bank should walk in the same direction with RBI to promote growth.
According to data released by RBI on Friday, bank deposits on September 21 stood at Rs 62.90 lakh crore-a year-on-year growth of 13.7% which is lower than 17.5% y-o-y growth experienced in the same period last year. Outstanding bank credit stood at Rs 47.66 lakh crore-a year-on-year growth of 16.4% down from 19.5% last year. Given the present level of bank deposits, a one percentage point reduction in CRR would release around Rs 62,000 crore. “We expect RBI to continue to ease liquidity to soften lending rates to revive growth. Our early 2013 recovery hypothesis, as we often point out, hinges on lending rate cuts. In fact, unless lending rates come off, FY13 growth will find it difficult to do our modest 5.6%, let alone the RBI’s 6.5% forecast,” said Indranil Sengupta, senior economist, Bank of America Merrill Lynch, in a report following last month’s 25-bps reduction in CRR which released Rs 17,000 crore.
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