Ahead of the Reserve Bank of India's monetary policy next Tuesday, Naina Lal Kidwai, country head in India and director for Asia Pacific, HSBC, on Friday said liquidity crunch called for a further cut in cash reserve ratio (CRR) and token reduction in interest rate.
The RBI has cut CRR by a total of 125 basis points since January amidst staggering gross domestic product (GDP) growth numbers.
While the CRR cut had injected close to Rs z30,000-40,000 crore in the money markets, the same amount was withdrawn by depositors between January-March 2012, said Kidwai.
“In effect, the money in circulation has been counterbalanced in the system. It has cancelled the potential impact of CRR cut. Tight liquidity points to high interest rates,” said Kidwai.
“Liquidity situation is a worry. The government borrowing is huge and the amount can crowd out the private sector borrowing. Further, a CRR cut will ensure the much needed liquidity. I would also like to see a token cut in interest rate,” added Kidwai. At present, CRR, the percentage of deposits banks have to park with the apex bank, is at 4.75 per cent.
The central bank had raised key policy rates 13 times between March, 2010 to October, 2011 to contain inflation. Currently the repo rate, which is the rate at which banks borrow from RBI, stands at 8.5 per cent. "Large corporates have been borrowing through external commercial borrowing (ECB). We have have been exporting our debt market,” she said.
Meanwhile, HSBC expects its advance growth to remain flat over the next few months.
