Bankers' move to seek interest on entire balances kept under the cash reserve ratio (CRR) with the Reserve Bank of India (RBI) does not seem to be finding favour with the regulator. | |
| In a media briefing this week, RBI officials said that while the balances in excess of the CRR requirement may look surplus to the system as a whole, in reality, the scene is quite different. |
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| At present, banks have to maintain 4.5 per cent of their net demand and time liabilities as CRR balances with the RBI and on a daily basis, the requirement is 70 per cent of this amount. |
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| At the end of the fortnight, RBI pays interest rate of 6 per cent or bank rate for the exact CRR amount and the surplus does not attract anything. It has been observed that for the public sector banks, balances in excess of CRR is a surplus. |
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| However, for foreign banks often these balances are drawn to meet transactions requirements as volumes of customer transaction are quite formidable compared to the capital base. |
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| To that extent, it amounts to be a product management tool for the banks and not actually a surplus. Therefore, the issue is till debated and a final decision is yet to be arrived at. |
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| Banks are of the view that if the entire amount gets remunerated, the rate of interest on the amount could be brought down by reducing the bank rate. |
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| However, accepting the entire balances under CRR and pay interest on it will be merely subsidising the entire surplus liquidity of the banking system, some section of the market feels. |
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| Moreover, market experts said that this will dissuade the banks from exploring other avenues for investing funds. They added that to that extent standing deposit facility "" as has been recommended by an expert group in RBI "" will be a better option. |
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| It will not only facilitate the RBI in sucking the excess liquidity from the market at a lower rate but also help the central bank in developing a effective benchmark in the lower end of the interest rate corridor. |
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| At present, while reverse repo at 6 per cent is the ceiling, call rates is serving as the lowest level which again is vulnerable to intra-day volatility. |
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| While the introduction of standing deposit facility will require amendment to the the RBI Act, the central bank has revised its liquidity adjustment facility from one day to seven day for better management of the day to day liquidity scenario. |
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| Moreover, it has armoured itself with the market stabilisation bonds and bills for absorbing the enduring liquidity in the market arising out of the copious foreign exchange inflows in the market. |
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