Bankers in favour of CRR cut

Bankers want the Reserve Bank of India (RBI) to address the prospect of liquidity tightening in the months ahead by reducing the cash reserve ratio (CRR).

The issue came up for discussion that RBI Deputy Governor Rakesh Mohan held today with chief executives of five big banks in the run-up to the mid-term monetary policy review slated for October 31. The predicament for the central bank, however, is the soaring money supply.

Against RBI's target of 15 per cent for 2006-07, the year-on-year growth in money supply as on September 15 was 19.6 per cent.

Bankers attended the meeting could not throw light on RBI's take on the interest rates. "Global cues are soft but on the domestic front, there is hardly any sign of slowdown. It all depends on how much weightage would the central bank give to external and domestic factors. There is a slim chance of a rate hike," said a banker.

The bank chiefs presented their views on the trends in credit demand and resource mobilisation. The chairman of a public sector bank told the RBI deputy governor that in the first half of 2006-07, non-food credit continued to grow at over 30 per cent and deposit had grown by over 20 per cent.

"The liquidity condition in the system looks comfortable as of now, but if the credit trend continues and given the net government borrowing programme of Rs 60,000 crore then liquidity would be under strain," he said.

Elsewhere, speaking to reporters, HSBC India head Naina Lal Kidwai said liquidity was likely to be under pressure with the likely pick up in demand for credit during the busy season.

"There is ample liquidity in the economy, but the money is not flowing into the banking system. We need to do more to attract more deposits," she said.

Banks had sustained the high growth in credit so far by liquidating part of their excess holdings in government securities. The banking sector's statutory liquidity ratio (SLR) holdings have fallen from a high of 42 per cent a couple of years ago to 27-28 per cent now, which is precariously closer to the minimum 25 per cent.

The bankers conveyed during the meeting that banks have little room to continue to sell investments to raise resources in the rest of 2006-07.

The discussion veered around the flexibility the amendment to the RBI Act has provided to the central bank in managing the CRR level. Banks are currently required to keep 5 per cent of their deposits with RBI as CRR.