Search the Internet          Tips  Sites: Finance, Investment

Roadmap for CRR cut set to be unveiled

BS Banking Bureau

The Reserve Bank of India's Monetary and Credit Policy on Monday is expected to chart out a roadmap for bringing down banks' cash reserve ratio to 3 per cent, the lowest permissible level.

Given the liquidity overhang in the system and the low level of interest rates across different markets, CRR cut may not be the need for the moment but as a part of financial sector reforms, the central bank is expected to announce a time-fame for lowering the CRR. The CRR is now pegged at 5.5 per cent.

The banking community, however, is sharply divided over the possibility a reduction in the bank rate from its present level of 6.50 per cent. A section of the bankers feel that the cut in the bank rate will not force the bankers to cut their lending rates.

Some of the public sector banks have recently pared their rates immediately after the budget. Moreover, there is no certainty that a cut in lending rate will prop up credit demand.

However, other section believes that to keep the sentiment positive and to reaffirm the central bank's bias to softer interest rate, there can be a token 50 basis point cut in the bank rate even though banks are reluctant to reciprocate the gesture by cutting their lending rates.

The RBI in its October credit policy had reduced the CRR rate by two percentage points to 5.50 per cent. It, however, withdrew all the exemptions on the net demand and time liabilities for the computation of the CRR.

This led to the release of Rs 80 billion of liquidity in the market instead of 200 billion which would be available to the banks if the exemptions were not removed.

Another 2.5 percentage point cut in CRR will release Rs 100 billion. However, since there will not be a one-shot paring the CRR level, the liquidity infusion will be in phases.

The central bank in its last credit policy has raised the interest paid on CRR to the level of bank rate (6.5 per cent). However, banks do not earn any interest on the eligible cash balances (that is balances up to 3 per.

Going by the international experience, many of the countries have already reduced the reserve requirement to zero or to such a low levels that this has lost the significance of a policy instrument.

In India, in the pre reform period, the RBI used to use CRR as a direct credit control instrument. It served the purpose of neutralising the high level of monetisation of the government's budget deficit.

However, as the automatic monetisation of the budget deficit has been stopped, and the government started borrowing at a market determined rate, the importance of this instrument has come down.

Since March 1991 to till date, it has been gradually lowered down to 5.5 per cent from a high of 15 per cent to provide the banks more lendable resources which they can deploy at higher market determined rates of interest.

Powered by

ALSO READ:
The Monetary & Credit Policy
The Rediff Budget Special
The Rediff-Business Standard Special
Money

Tell us what you think of this report