Bankers who were expecting a reduction in the cash reserve ratio (CRR) in the mid quarter policy review scheduled on 17 September will be disappointed after Reserve Bank of India’s deputy governor Subir Gokarn’s comment on liquidity.
"For the last several weeks, liquidity levels have been in our comfort zone. If signs of stress emerge particularly, if they persist, then we will take that into account," news agency Reuters reported quoting Gokarn. RBI aims to keep liquidity deficit within 1% of the net time and demand liabilities of the banks, which is roughly Rs 60,000 crore.
Gokarn was in New Delhi to deliver an address at the inaugural session of National Finance Symposium 2012 on ‘The New Era of Regulation in Finance’.
In September, till last Friday, banks have borrowed an average of Rs 12,000 crore from the repo window of RBI sharply below the August average of Rs 46,000 crore. Today, banks have borrowed Rs 43,250 crore from RBI. This is the first week of the reporting fortnight, in which banks generally front load their requirement.
Last week, State Bank of India’s chairman Pratip Chaudhuri had said he expects RBI to reduce the cash reserve ratio by 100 bps in the upcoming mid quarter review. CRR is the proportion of deposit that the banks need to keep with RBI as cash. CRR balance with RBI earns no interest to the banks. Chaudhuri also argued that a CRR cut will help banks more to cut lending rate than a repo rate cut.
However, market participants said since liquidity is comfortable and with inflation still above the central bank’s comfort zone, chances of a CRR cut is very low. At present, CRR stands at 4.75%.
“Inflation has not eased and on the contrary, erratic and skewed monsoon has aggravated inflationary risks. Though monsoon has picked up now, some definite damage has already been done, with regard to pulses, oil seeds and coarse cereals,” said Rupa Rege Nitsure, chief economist, bank of Baroda.
The country’s headline inflation based on Wholesale based price index fell to 3 year low to 6.87% in July, from 7.25% in June. However, it still remained the above the central bank’s medium term comfort zone of around 5%. The August inflation data will be announced on Friday.
“The recently released PMI data show, for the manufacturing sector output prices are increasing at a faster pace than input prices which is reflective of demand pressures in the economy. This, in fact, has resulted in further hardening of core inflation. As a result, the chance for lowering the CRR (on Sep 17) is very low,” Nitsure said.
The central bank had reduced CRR by 125 bps earlier this year to ease liquidity conditions. The policy rate or the repo rate was reduced in April by 50 bps to 8% but was kept unchanged in the two subsequent policy meetings.
