Letters: Confusing analysis

With reference to the piece, "Should the CRR be abolished?", a discussion that was opened and shut four years ago has been re-opened by the writer Sitharam Gurumurthi without much clarity.

As an ordinary citizen, who believes that monetary policy is a tool to attain price stability internally and rate stability externally, I am confused why prices are rising despite the country's central bank having at its disposal the legal tool of cash reserve ratio (CRR).

Even if inflation is contained, it means the damage has been regulated, not obviated. It makes me doubt the effectiveness of the CRR in the context of its need for securing monetary stability.

Gurumurthi laments that the State Bank of India (SBI) has an interest spread of more than 10 per cent. However, other than comparing the interest payout rate of its savings account and the peak lending rate of a singled-out product, no statistics have been furnished in the article. The margin is not calculated on the basis of individual products, but as a mark-up of yield on advance (YoA) (interest earned as a per cent of average gross loans) over the cost of deposit (CoD) (interest paid as a per cent of average aggregate deposit).

For FY 2015, SBI had a YoA of 10.58 per cent per annum and a CoD of 6.34 per cent per annum, leaving a margin of only 4.24 per cent per annum, which has to take care of all operating and non-operating expenses, including the CRR cost, plus generate a moderate profit.

Just because the statutory liquidity ratio (SLR) is maintained by banks, is it rational to tell them that they are not maintaining mandatory SLR as there is no penal provision? Any such apprehension is childish. What is required is a healthy discussion on the necessity of maintaining the CRR.

P D Sankaranarayanan Thiruvananthapuram

Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number