The Reserve Bank of India may need to cut Cash Reserve Ratio (CRR) by over 200 basis points to infuse about Rs 1,00,000 crore to ease the tight liquidity situation and fund credit growth, according to rating agency CARE.
The deposit growth is lagging behind the credit offtake by a wide margin. Commercial banks in the country have raised Rs 4,90,552 crore in the 11 months (10.9 per cent growth) of the current financial year. They lent an almost similar amount (Rs 4,90,445 crore) in April 2010-January 2011, according to RBI data.
Banks have liquidated part of the investments to fund growing credit demand. RBI has the option to reduce the Statutory Reserve Ratio or cut CRR further. The monetary authority prescribes banks to keep a certain amount from deposits aside to keep themselves liquid. For SLR, banks park money in government securities.
Reduction in SLR and CRR can lead to an increase in systemic liquidity. SLR is relatively more static and is viewed as a strategic tool of the RBI to maintain the financial soundness of the banking system. Hence, the cut in SLR sends signals of a longer-term accommodative stance of the apex bank, which it may not be comfortable with. Accordingly, CARE Research feels the RBI may not cut the SLR further below the existing 24 per cent. This leaves the RBI with the option of reducing CRR, construed by the industry as the more dynamic monetary tool used for short- to medium-term policy actions.
A one per cent cut (100 basis points) in CRR would release approximately Rs 50,000 crore in the system. Theoretically, a more than 200- 250 bps cut in CRR would be required to ease the tight liquidity situation, CARE said.
Although a cut in CRR is inevitable in CY 2011, this quantitative easing tool would be used more vigilantly by the RBI, it added. CARE believes banks with a large branch network and high proportion of CASA deposits would benefit in this challenging situation .
