An increase in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) might not translate into an immediate increase in lending and deposit rates, bankers said.
Bankers pointed out that the system was flush with funds and companies were still not drawing upon the sanctioned loan facilities despite a pick-up in demand for credit.
For instance, till recently, for State Bank of India, the gap between sanctions and disbursals was of the order of Rs 50,000 crore (Rs 500 billion).
A broad section of the financial sector players expects the Indian central bank to increase CRR, or the proportion of deposits that banks set aside, by 50 basis points (bps) in the third quarter review of the monetary policy due on Friday.
One basis point is a hundredth of a percentage point. There are also a few who expect policy rates to start moving up (see graphic-- business-standard.com/general/pdf/012610_01.pdf).
"This mode of exit - removing liquidity first and then following it up with rate hikes -appears to be an internationally-accepted norm for those economies that went in for heavy liquidity easing. The US Fed, which led the quantitative easing drive, seems to focus on withdrawing its bond buyback programme before easing rates. China's first monetary step taken last week was a hike in reserve requirement," HDFC Bank said in a recent report.
An increase of 50 bps in CRR would suck out around Rs 20,000 crore (Rs 200 billion) from the system. But given the low credit demand for the last two months on an average, banks parked upwards of Rs 70,000 crore (Rs 700 billion) with RBI through the daily reverse repo operations.
The growth in bank credit, which dropped to 9.65 per cent for the year-ended October 2009, has seen some improvement. But bankers attributed a part of the Rs 79,515-crore disbursals by banks in the last fortnight of December 2009 to quarterly targets.
Besides, some said, the government had also put pressure on the public sector players to help loan growth.
"Liquidity is available in the system. Though an increase in CRR will suck out some liquidity from the system, but interest rate is also a function of demand and supply. Banks have sufficient liquidity and deposit growth is also healthy. Economic growth has just started and RBI may not like to do anything to hamper it, though inflation is a concern," said Allahabad Bank Chairman and Managing Director JP Dua.
Andhra Bank Chairman and Managing Director RS Reddy added that an across-the-board rise in lending rates was unlikely due to an increase in CRR. There could be repricing of lending rates for loans granted at rates below benchmark prime lending rates (BPLR), he added. "It would help improve margins," Reddy said.
With banks beset by low credit demand, they have been offering short-term loans at a discount to the prevailing BPLR to ensure they could earn some returns on funds which would be otherwise sitting idle.
Besides, there will be a rush to meet the annual credit growth targets during the last eight weeks of the financial year, a senior banker said.
"It depends on what kind of rate hike we are talking about. If it is a (rate hike) symbolic hike, nobody will upset the term rate structure. I don't think that a 25 or 50-bps increase in CRR will immediately upset the credit markets and term rate structure because of liquidity and the need for achieving the loan target," said Oriental Bank of Commerce Chairman and Managing Director TY Prabhu.
In addition, the Centre's borrowings are due to end soon with the last tranche of Rs 8,000 crore (Rs 80 billion) to be auctioned by the first week of February. This is also expected to result in lower pressure on liquidity, as the government has been borrowing between Rs 7,000 crore (Rs 70 billion) and Rs 10,000 crore (Rs 100 billion) a week since October.
There could be some movement on the deposit rate side, with the rate on a few maturities seeing an upward bias.
So far in 2010, ICICI Bank and Union Bank of India have raised rates on one maturity each. But as ICICI Bank Managing Director & CEO Chanda Kochhar told Business Standard in an interview last week, "An increase in one bucket should not be seen as an increase in interest rates."
