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The temporary hike in CRR due to high deposits with banks is not a concern, but RBI should cut repo by 0.25 per cent to 6 per cent in next policy review in December to adjust balance between high liquidity and interest rates, says Yes Bank.
Despite the cash reserve ratio (CRR) hike, the systemic liquidity would still be in a comfortable surplus of over Rs 1.5 lakh crore, according to the private lender.
Last week, RBI hiked CRR to 100 per cent on incremental deposits mobilised between September 16 to November 11 on a temporary basis to suck out excess liquidity after deposits of Rs 500 and Rs 1,000 notes following their withdrawal.
"This will boost RBI's policy stance of keeping overnight money market rates close to policy repo rate. Going forward, I expect liquidity fine-tuning exercise to be complemented by a reduction in repo rate by 25 bps (0.25 percentage) to 6 per cent in the upcoming monetary policy review in December," Yes Bank MD and CEO Rana Kapoor said.
CRR, at 4 per cent currently, is the portion of money banks are required to park with RBI without earning interest.
Yes Bank said there has been a never-seen-before surge in systemic liquidity leading to fall in overnight money market rates by nearly 0.25 per cent below the policy repo rate, which stands at 6.25 per cent currently.
It expects overnight money market rates to further deviate from the policy repo rate -- at which RBI lends to banks -- fanning unwarranted exuberance and volatility.
"However, the incremental CRR hike is a normaliser and ad hoc measure to be viewed as a temporary response and will start reversing once the deposit mobilisation by banks reaches a state of steady equilibrium," said Kapoor.
"Inflation is firmly under control and this will drive cost of liquidity lower and help in supporting growth momentum."
According to Yes Bank, the CRR hike will mop up Rs 3.1 lakh crore from the banking system and increase RBI's wherewithal to absorb liquidity by a cumulative of over Rs 10.5 lakh crore.
This trend of a significant surge in deposits is expected to continue over the next few weeks.
"The tapering of deposit base will commence once most of the currency in circulation in high-value notes finds its way into the banking system along with easing of restriction on withdrawals," Yes Bank added.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)