The Hindu Business Line : Slowdown in credit offtake is major concern

Bangalore, Oct 29 With volatile capital flows beginning to wind down, banks have now discounted the possibility of hikes in the cash reserve ratio in the peak season Credit Policy to be announced by the Reserve Bank of India.

Bankers said that the CRR that currently stands at 7 per cent was unlikely to be hiked. Kotak Mahindra Bank Ltd’s Executive Vice-Chairman and Managing Director, Mr Uday Kotak, said, “We are not expecting any hike in the CRR this time.”

Following the regulatory initiatives to contain hot capital inflows, foreign institutional investments in the domestic equity markets last weekend dropped drastically to just $52.8 million.

The drop in inflows resulted in a drop in the RBI’s mop-up through the reverse repurchases. At today’s liquidity adjustment facility auction, the recourse to the reverse repo window was just Rs 18,605 crore or about half of what was on October 22. Besides, the number of banks that took recourse to this window was down to only 15 compared to 22 at the last weekend’s auctions.

Bankers said that one of the major concerns overshadowing the Credit Policy was the slowdown in credit off take. Credit off take since the beginning of this financial year was Rs 90,262 crore as on October 12. During the corresponding period of the last financial year, it was Rs 1,30,764 crore. Hiking the CRR, bankers said, at this juncture was likely to translate into lending rate increases. This was because, CRR deposits with the RBI earns zero interest for the banks. Lending rates for top corporates are already close to the prevailing benchmark prime lending rates – ranging between 11.5 and 13 per cent. Besides, many banks continue to offer deposit rates of close to 9 per cent. With inflation currently at 3.07 per cent, interest rates are seen to be on the high side. The one year real yield is currently over 4 per cent.

Fed factor

Yet some bankers have preferred to remain cautious. ICICI Bank’s chief Economist, Mr Samiran Chakraborty, said, “A CRR hike decision would depend on the RBI’s outlook on inflows through Participatory Notes.” In the current scenario, although the inflows appear to have tapered down, there could be changes, he added. The changes hinged on the U S Federal Reserve Board’s decision on the same day.

Markets world wide are expecting a 25 to 50 basis point reduction in the key Fed Funds rates (this is the rate at which U S banks borrow/lend overnight reserves), from the current level of 4.75 per cent. A Fed Funds reduction would raise the arbitrage margins between India and the US. Currently this margin is about 1.25 cent. This was assuming the difference between the funds rate and RBI’s reverse repo rate. Dr Chakraborty said, “A Fed Fund drop will leave the RBI few alternatives other than tweaking the CRR once more.” This was to check such arbitrage flows, he added.

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