Rangarajan says CRR should be reduced

Calls for long-term plan to recapitalise PSBs

The chairman of Prime Minister’s economic advisory council, C Rangarajan, has added to the debate on banks’ Cash Reserve Ratio (CRR), saying it should be brought down and used only in extraordinary conditions. He said the need for using it reduces with the option of Open Market Operations (OMOs) in place.

“As OMOs become an increasingly used instrument of credit control, the role of CRR will come down. We need to move towards a situation where the level of CRR comes down and it is used as an instrument of credit control only in extraordinary circumstances,” said Rangarajan.

He said CRR was a major instrument of credit control prior to 1991 but its role needed to be looked at in current conditions.
 

PMEAC PRESCRIPTION

• If government fails to capitalise public sector banks in a time-bound manner under Basel-III norms, their market share will fall
• About 50% of additional capital needs will have to come from the govt, for which it has to make additional budgetary support 
• Low base effect in the second half of last year will help gross domestic product to show higher growth by end of this financial year
• Growth rate will pick up, and perhaps in another two years’ time it will be back to 8 per cent rate of growth

On growth, Rangarajan said the low base in the second half of last year would help India’s gross domestic product to show higher growth by the end of this financial year. Also, improvements in sectors such as coal, power and infrastructure would help boost growth in the second half. He expects the economy to grow at 6.7 per cent in 2012-13.

“The growth rate in the current fiscal year will be a shade better than last year. As we move further ahead, the rate will pick up and perhaps in another two years time, it will be back to eight per cent growth,” he said on the sidelines of the Annual Ficci-IBA Banking Conference here on Thursday.

If, he cautioned, the government failed to capitalise public sector banks (PSBs) in a time-bound manner under the new Basel-III norms, their market share would come down.

“Under the present dispensation, about 50 per cent of the additional capital requirements will have to come from the government, for which it has to make additional budgetary support. For this, government needs to draw a long-term programme,” he said.

Two days earlier, Reserve Bank of India governor D Subbarao had indicated the government would need to infuse Rs 90,000 crore of capital to retain its present equity share in PSBs.

Rangarajan also suggested periodic entry of new banks in the system, if the latter was to remain competitive over time.

A closed system can only become oligopolistic, he warned.

RBI deputy governor Anand Sinha said the regulator would take a view an licencing new banks only after the Banking Regulation Act changes came through. He said the consultation process was over. RBI had put out the draft guidelines for new licences in August 2011 and the gist of the feedback was made public this July.