Bankers expecting a reduction in the cash reserve ratio (CRR) at the Reserve Bank of India’s (RBI’s) mid-quarter policy review, scheduled on the coming Monday, will be disappointed at Deputy Governor Subir Gokarn’s comment on liquidity.
“For the last several weeks, liquidity levels have been in our comfort zone. If signs of stress emerge particularly, if they persist, then we will take that into account,” news agency Reuters quoted him as saying.
RBI aims to keep the liquidity deficit within one per cent of the net time and demand liabilities of banks, roughly Rs 60,000 crore. CRR is the proportion of its total deposits a bank has to keep with RBI as cash, presently at 4.75 per cent; it earns them no interest.
Gokarn was in New Delhi to deliver an address at the inaugural session of the National Finance Symposium 2012 on ‘The New Era of Regulation in Finance’.
An RBI official added the liquidity situation was currently well within the comfort zone, so it did not warrant specific action, either by way of altering the CRR or open market operations. If the situation changed, the central bank would apply these tools, he said.
In September, till Friday, banks borrowed a daily average of Rs 12,000 crore from the repo window of RBI, sharply below the August average of Rs 46,000 crore. Today, though, banks borrowed Rs 43,250 crore from RBI. It also happens to be the first week of the reporting fortnight, in which banks generally front-load their requirement.
Last week, State Bank of India Chairman Pratip Chaudhuri had said he expected RBI to reduce CRR by 100 basis points (bps) in the coming review. He said a CRR cut would do more to help banks cut their lending rates than a cut in the repo rate, at which RBI lends to banks. Market participants said with liquidity comfortable and inflation still above the central bank’s comfort zone, chances of a CRR cut are very low.
“Inflation has not eased and, on the contrary, an erratic and skewed monsoon has aggravated inflationary risks. Though the monsoon has now picked up, some definite damage has already been done with regard to pulses, oilseeds and coarse cereals,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.
The country’s headline inflation, based on the wholesale price index, fell to a three-year low of 6.87 per cent in July, from 7.25 per cent in June. However, it was still above the central bank’s medium-term comfort zone of around five per cent. The August inflation data will be announced on Friday.
“The recently released PMI (Purchasing Managers Index, a monthly index of financial activity) data show, for the manufacturing sector, output prices are increasing at a faster pace than input prices, reflective of demand pressures in the economy. This has resulted in further hardening of core inflation. As a result, the chance for lowering the CRR (next Monday) is very low,” said Nitsure.
The central bank had reduced CRR by 125 bps earlier this year, to ease liquidity conditions. The repo rate was reduced in April by 50 bps to eight per cent but was then kept unchanged in the two subsequent policy meetings.