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Sharp CRR Cut Paves Way for Lower Rates
But dramatic impact on loans & liquidity unlikely
Minutes after money market traders hung up their phones, the Reserve Bank
of India unexpectedly slashed the cash reserve ratio (CRR) of banks by as
much as 75 basis points, setting the tone for lower interest rates and
easier liquidity. Perhaps, it didn’t have a choice: next week’s industrial
production numbers are likely to dip, high-street banks have been paying
through their nose to borrow, and . 60,000 crore will flow out of the
market by March 15 as corporates pay advance tax.
If the RBI had dragged its feet, it would have been forced to cut CRR — the
slice of customer deposits banks keep as cash with the central bank — on
March 15 with retrospective effect. Only once in the past has the central
bank cut CRR with retrospective effect — something it wanted to avoid with
the money market gasping for breath. Friday’s CRR cut, from 5.5% to 4.75%,
will immediately release . 48,000 crore into the system. While it’s
unlikely to have a dramatic impact on liquidity and rates, it may improve
market sentiment. “It’s purely a liquidity-easing measure. Banks may not
rush to cut lending and deposits rates due to year-end considerations. But
a cut in policy rates and easing of liquidity could prompt banks to cut
rates,” said RK Bakshi, executive director, Bank of Baroda. The RBI had
last cut CRR on January 24 by 50 bps. According to Rana Kapoor, MD &
CEO, Yes Bank, “Unless we see liquidity deficit stabilising in the range of .
40,000-60,000 crore, banks are unlikely to cut deposit or lending rates.”
Banks have been borrowing more than . 1 lakh crore overnight money from the
RBI.
There is a widely-shared perception that the CRR cut also reflects some
quid pro quo between the Reserve Bank and government, which may have
promised that fiscal deficit would be reined in. Significantly, the CRR cut
comes a fortnight after C Rangarajan, chairman of the PM’s Economic
Advisory Council, said he favoured open market operations to CRR cut for
managing liquidity.
Home loan borrowers may have to wait a little longer for softer rates, but
corporate borrowers in the bond market will see their costs dip. In the
last few deals before the market closed on Friday, interest rates on
certificates of deposits (CDs) fell from 11.30% to 10.95%.
A rate cut on reporting Friday is more effective in easing liquidity
conditions as banks have to park lesser funds with the Reserve Bank with
immediate effect.
“I think the RBI is finally beginning to recognise the urgent need to
revive growth. This greater-than-expected CRR cut is also a signal to the
upcoming monetary policy, where they are likely to cut repo rates as well,”
said Rajiv Kumar, secretary, FICCI.
Rashesh Shah, chairman & CEO, Edelweiss Group, said, “It will be
positive for the market.”
Sources: The Economic Times, Mumbai
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