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October 18, 2001
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RBI may cut CRR by 50 basis points: I-Sec

The RBI is likely to cut the cash reserve ratio by 50 basis points to 7 per cent, but may leave the bank rate untouched in its mid-term Credit and Monetary Policy review to be announced on October 22, according to ICICI Securities.

"With the intention to bring down CRR to 3 per cent over a period of time, the RBI will affect a 50 basis point reduction with a further 0.50 per cent cut contingent on the strength of the credit offtake in the third and fourth quarters," I-Sec said in its latest debt market review.

However, the chances of a reduction in the bank rate were low, the report said, adding that expectations of a rate cut had continued to support bond prices.

The cut in CRR was warranted by the likely continuance of the current trend in non-governmental credit in the second half and the Centre's borrowing programme, it said.

"We expect liquidity to remain under pressure and call rates to hover around the reverse repo rate till government spending gradually starts restoring liquidity", the report added.

The liquidity position could improve earlier if the RBI decides to slash CRR in its mid-term policy, it said.

The growth of non-food credit adjusted for investment in non-government securities had stabilised at 11-12 per cent, and the lending volume was expected to touch Rs 510 billion in the third quarter.

If the non-government credit offtake continues along the current trend, "there will be tightness in the money market putting an upward pressure on interest rates," the report said.

CII moots 200 bps cut in CRR

In its recommendations to the Reserve Bank of India for the busy season credit policy, the Confederation of Indian Industry has suggested a reduction in CRR by 200 basis points from the current 7.5 per cent to 5.5 per cent.

An immediate release of Rs 164 billion into the system will induce banks to begin cutting deposit and lending rates, CII added. While India does suffer from very high real interest rates, CII has argued that in the absence of a fall in deposit rates, the RBI's reducing bank rates will not amount to much.

The recommendation to reduce the CRR was one of the nine reform areas outlined by CII in its note to the RBI. The other key areas identified by CII included the NPA overhang, bankruptcy reforms, the issue of regulatory reforms and adverse selection, priority sector lending, universal banking, statutory liquidity ratio, margin requirements for lending against shares and bank privatisation.

Focussing its recommendations on structural reforms, CII has pointed out that the slew of regulatory reforms has not been accompanied by adequate structural reforms of the financial sector in India.

Acknowledging that the banking system is still reasonably removed from a systemic shock, CII however, expressed concern over the perceptible increase in systemic risk due to rising NPAs every year. In this scenario, CII emphasised that structural reforms, especially of the public sector banking system, is the key to avoiding a systemic shock.

Particularly so, given the state of the economy for 2001-02, CII fears a sharp rise in NPAs for the public sector banking system as a whole. The need of the hour is to urgently deal with not just the present of NPAs, but also to put in place effective legislation and procedures that prevent their future flows.

Recommending a 5 percentage point reduction in priority sector lending as a first step, CII has stated that the RBI can, in the next six months, evaluate whether this reduction has actually affected the demand for, and the price of, loanable funds to the priority sector.
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