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BL Research Bureau

RBI has announced that it will reduce the Cash Reserve Ratio by 50 basis points with effect from October 11. Though the move will only partially ease the banks’ prevailing tight liquidity conditions, it will at least release around Rs 20,000 crore of funds (now yielding nil returns) for lending operations.

RBI has made it clear that “this measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions”.

Banks have borrowed as much as Rs 90,000 crore through the repo window after the RBI relaxation allowed banks to borrow additional funds by pledging their SLR securities (informally reducing the SLR to 24 per cent).

Banks have also been borrowing in the call money markets, with rates shooting up as high as 16 per cent. This indicates the scarcity of liquidity in the financial system, which is already suffering from global turmoil. RBI data suggests that banks have only 9.88 per cent as cash/deposit ratio as on September 12, indicating that they have very little surplus cash after putting aside the CRR.

In addition, the data also indicates no slowdown in credit growth, at 26.1 per cent currently, remaining way above the RBI’s comfort limit of 20 per cent. Many banks have already discontinued lending sub-PLR loans and also low-yielding loans.

Disbursement of the first instalment of debt waiver of Rs 25,000 crore and advance tax inflows may also help liquidity. While the CRR cut would ease liquidity to some extent, it is unlikely to prompt interest rate cuts by banks. Given that the inflation threat still remains, banks may maintain a keen watch on the half-yearly policy review on October 24 for a further decision on the rates.

More Stories on : Stock Markets | CRR & Bank Rates

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