The Hindu Business Line : CRR cut: May be by November

The RBI has Rs 1,95,000 crore of their money stashed away as interest- free ‘deposits’. This is what a 7-per cent CRR yields when levied on the August 3, 2007 deposit level of Rs 28,00,000 crore.

A 6.5% CRR would suffice to generate this yield if deposits rose 10 per cent.

Things look good on this front. In recent years, bank deposits have generally gone up by 10 per cent between slack and busy quarters; and have invariably gone up yet another five per cent over successive slack quarters.

Deposit growth

August 2007 deposits were 24 per cent higher than August 2006, three percentage points higher than the 21 per cent increase registered over 2005-06.

Back-of-the-envelope calculations suggest that aggregate bank deposits will easily sail past Rs 30,00,000 crore over the next four or five months.

So there is a clear window of opportunity for both banks and the RBI to have their cake and eat it too.

The Finance Ministry’s efforts to pass the costs of forex sterilisation to the banks through a series of CRR hikes would have ended in near disaster but for the quick decision to make up for lost time.

The doubling of MSS balances since March helped bring about the much needed lull in the battle for the rupee.

RBI options

But the RBI would prefer to avoid the predicament of Old Mother Hubbard. Even with an unutilised MSS capacity of Rs 50,000 crore, it will not loosen up too quickly on the CRR. This is because the CRR ensures a constantly increasing kitty even without any change in the rate.

In short, the reason for not totally letting go of the CRR is precisely the same as the reason for trimming it a bit over the next few months.

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