Joydeep Ghosh: CRR cut makes up for no rate cut

Rs 17,000 crore of additional liquidity will help banks cut rates

Duvvuri Subbarao, today, continued to follow the Reserve Bank of India’s pre-stated template – no rate cut till inflation comes down.

However, the infusion of liquidity through the cash reserve ratio cut could serve the purpose equally well. Bankers, including SBI’s Pratip Chaudhuri have said in different forums that more liquidity in the system would automatically bring down rates.

The CRR cut, which will infuse Rs 17,000 crore of additional liquidity, implies that instead of a direct cut, the apex bank is putting more money in the hands of banks. This could help them earn more interest income and shore up their bottom lines.  

Not that the banks are short of cash. Even before the CRR cut, the system has had enough liquidity. This has already led to three leading banks – SBI, ICICI and HDFC Bank – cutting deposit rates.

Some rate cuts have also happened. Public sector banks, after Finance Minister P Chidambaram asked them to, have already cut lending rates for the festival season. More rate cuts could take place in the future.  

What matters more is that Subbarao has sent a positive signal. RBI’s policy statement is being largely construed as dovish. There has been a pat on the government’s back as well – “Domestically, growth continues to be weak amidst a negative investment climate; however, the recent reform measures undertaken by the government have started to reverse sentiments,” the statement says.

But would it have really mattered if the policy rates were cut by say, 25 to 50 basis points (bps)? There are serious doubts.

A rate cut, in real terms, would have served as a signal – something, company head honchos and industrial bodies are going to rant about in their statements today.

But one wonders, how many sectors really need the money. Sectors, which need money desperately, are anyways in trouble and unable to pay their existing loans – the line to join corporate debt restructuring is getting longer every quarter. Many other sectors are sitting on cash in the absence of opportunity or slowing down of demand.

What is commendable is that the governor has held on to rates despite serious pressure from all quarters. There were numerous theories that were floated last week. “The government has, most probably, done a deal with the RBI. After the diesel price hike and FDI – both points which the apex bank has raised in earlier policies – RBI can’t defer rate cuts,” said an economist. All those theories have been put to rest.
As for the stock markets, the Sensex has corrected by 100 points since the policy statement. It will, most likely, shrug this off and continue its northward journey in the coming days, perhaps hours.