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India Ratings and Research (Ind-Ra) estimates excess cash reserve ratio (CRR) requirement will additionally cost the banking system INR10.5bn on a monthly basis. The agency believes the relief from the Reserve Bank of India (RBI) would come in a staggered manner, as relieving this high quantum of liquidity all at once will come with challenges.
Unwinding of CRR Hike to be Slow: In Ind-Ra's opinion, normalisation of the CRR requirement will be gradual and staggered, as the RBI may exercise caution before releasing the mopped up INR3trn to banks. The persistence of the surplus liquidity conditions will lead the RBI to evaluate alternatives available for liquidity sterilisation. Ind-Ra continues to believe cash management bills can effectively manage the liquidity - owing to their short tenor and consistency with the monetary policy stance.
Floor Placed on Bond Yields: Ind-Ra believes that the RBI's decision to mop up excess liquidity will ensure a floor is put on bond yields. The shorter end of the yield curve is likely to underperform the longer end, as outsized impact will be felt on the former. The longer end of the curve will focus on the evolving global conditions and also upcoming RBI's monetary policy review.
Monetary Policy Transmission to be Impeded: Ind-Ra expects banks to be more proactive in bringing down their term deposit rates, as the increase in CRR requirement creates a drag on the short-term profitability of banks. The move, which is temporary in nature, does not impair the longer term profitability of banks, but induces a larger negative carry on CRR in the computation of the marginal cost-based lending rate (MCLR). In Ind-Ra's view, the offsetting impact of a larger negative carry on CRR compared with cheaper deposits would restrict any significant downward movement of MCLR, hampering smooth monetary transmission.
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