RBI may focus on monetary transmissions in 2014 policy reviews

Few economists suggest hikes in CRR while others believe it would be through careful liquidity calibration through various liquidity windows

The Reserve Bank of India's (RBI) focus in monetary policy reviews in 2014 may be on monetary transmission which has not happened in tandem with the rate cuts and rate hikes in 2013.

Few economists suggest hikes in Cash Reserve Ratio (CRR) while others believe it would be through careful liquidity calibration through various liquidity windows like Marginal Standing Facility (MSF), Liquidity Adjustment Facility (LAF), term-repo windows or export credit refinance.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. The CRR currently stands at 4% of banks Net Demand and Time Liabilities (NDTL). The repo rate or the rate at which banks borrow from RBI stands at 7.75%. While the MSF rate is at 8.75%.

“If RBI wants to see the transmission to happen then they will have to control liquidity. I am expecting hikes in CRR. There may be CRR hikes of 50 basis in 2014 to tighten the liquidity so that transmission will happen. RBI may go for pause with the repo rate,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.

But many economists do not agree with the idea of hike in CRR. "For the monetary transmission to happen in the banking system, RBI may continue to focus on careful liquidity calibration. I do not expect a hike in CRR at this point of time,” said Siddhartha Sanyal, chief India economist, Barclays.

The slowing growth is another factor due to which economists do not see a hike in CRR. “I do not believe in a CRR hike especially when the economy is trying to find its feet to accelerate growth.

Rather, careful liquidity calibration through various liquidity windows will ensure an efficient transmission. Important to note that, transmission had remained weak in the declining interest rate cycle beginning January 2013 to September 2013 wherein while the repo rate was reduced by 75 basis points., the base rates in the banking system had not moved lower by much.

As such, in the current rising policy rate environment, the banking system has not responded by raising base rates. Additionally, weak credit demand conditions too are not conducive for interest rates moving higher,” said Shubhada Rao, chief economist, YES Bank.

Prime Minister Manmohan Singh has pegged the country’s economic growth at 5% for the financial year ending March 2014. Experts believe economic growth will start picking up from next fiscal due to which monetary transmission will be smooth.