Abolishing the cash reserve ratio (CRR) will impact banks in two ways. One, it will generate additional liquidity to the extent that banks will not need to borrow in the market or from the Reserve Bank of India’s (RBI’s) repo window. Two, they will be able to deploy the released amount profitably by lending to needy borrowers. This will either result in improved net interest income for banks or may allow them to marginally reduce interest rates to select borrowers. Obviously, even with the abolition of CRR, banks can’t reduce base rates unless the cost of deposits or cost of borrowing comes down without diminishing the net interest margin. There is no merit in the case for abolishing CRR: (a) it is a kind of reserve – however small – that needs to be maintained as a prudential measure for an exigency; and (b) it is needed as a monetary tool for RBI to modulate liquidity in the system. Therefore, the better course for RBI would be to maintain the status quo, but compensate banks to some extent by paying a nominal interest at 50 per cent of its repo rate.
S Ravindranath, Coimbatore
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