Banks look for more cash reserve ratio cuts

KOCHI: Banks are expecting more surprises on the CRR (Cash Reserve Ratio) front in the Reserve Bank of India's (RBI) credit policy review scheduled later this month. While trying to manage tight liquidity conditions prevailing in the economy, banks are hoping that a further CRR cut of at least 50 bps (or 0.5%) would ease pressure on credit availability.
Banks also said that the growth agenda assumes equal importance in a slow growth scenario for the Indian economy."A CRR rate cut of at least 50 bps in the upcoming credit policy review will help kick-start the economy and ensure room for manoeuvre through higher liquidity," said Federal Bank CEO Shyam Srinivasan.
CRR is the percentage of deposits that banks have to mandatorily maintain with the RBI. A rate cut of at least 50 bps by the apex bank in its credit policy would release Rs 25,000-30,000 crore into the economy.
Last month, RBI had slashed CRR, the percentage of deposits that banks have to keep with the RBI, from 5.5% to 4.75%. Repo rate, or the rate at which banks borrow from RBI, stands at 8.5%.
Dhanlaxmi Bank CEO P G Jayakumar said a further reduction in CRR would be prudent as any liquidity easing would benefit the banking system. "Lowering the CRR rate by at least 50 bps could increase the cost of lending, though temporarily. The current tight liquidity conditions will also ease. Lending rates are bound to cool off soon. Greater credit availability through lower CRR will help the banking system, so one more CRR cut from RBI would be desirable," he said.
Jayakumar said key inflationary agents like high oil prices continue to be spoilers in the growth story, and growth must be ensured without compromising on the battle against inflation. Srinivasan noted that the increase in service tax effected in the Union Budget would have an indirect impact on inflation and hence growth imperatives should be balanced well against counter-inflationary measures.
Srinivasan also said the tight liquidity conditions currently prevailing in the markets are primarily because of the investor scramble in March. "This situation should correct itself this month. The bigger issue is for the RBI to kick-start growth," he said.
While high interest rates are inflationary, Srinivasan said that the real spinoff from a CRR rate cut would be the growth incentive. "People have not really been averse to high interest rates as we have always been a high interest country. They are more concerned with growth and this is where the government must provide the right lubricants for the economy," Srinivasan said.
The RBI is scheduled to announce its annual monetary policy on April 17.