The Hindu Business Line : Bankers anticipate another cut in CRR

Mumbai, Oct. 9 As the rupee fell to a six-year low on account of huge amount of capital outflows from the domestic equity markets and with the RBI continuing to sell dollars, liquidity conditions are expected to remain tight in the coming months despite the cut in Cash Reserve Ratio (CRR), said bankers and analysts. Therefore, it is likely that the RBI may take more measures to address the liquidity problem, such as another cut in CRR. A cut in repo will not help in the current scenario, given that inflation is still at around 12 per cent.

On Wednesday, the rupee touched 48.80 in tandem with the 950 points intra-day fall in the Sensex. The forex markets recovered after central banks of several countries announced rate cuts.

The RBI has been regularly selling dollars in the forex market, to stabilise the rupee, which is sucking out liquidity from the system. This would neutralise the effect of the Rs 20,000-crore capital injection into the system by the CRR cut, which will come into effect from October 11.

Liquidity management

While the other countries are cutting rates as a response to the serious threat of recession, the cut in CRR by the RBI was essentially aimed at liquidity management. With inflation hovering around 12 per cent, the RBI will continue to focus on inflation control. A cut in the repo rate can be expected only early next year, said analysts.

With the rupee depreciating by almost 18-19 per cent in the past six months, the cost of importing raw materials is increasing. A depreciating rupee is also shaving the gains of the reduction of oil prices, said Mr Dharmakirti Joshi, Director and Principal Economist, Crisil.

Even with the removal of restrictions on the participatory notes, not much capital inflow is expected. Investors are risk averse and the credit squeeze will continue.

The RBI’s overall stance on monetary policy is to accord a high priority to price stability and well-anchored inflation expectations, said Mr Tushar Poddar, Vice President - Asia Economics Research, Goldman Sachs.

“With inflation still hovering around 12 per cent, we do not think that the RBI is ready, as yet, to cut the repo rate. We continue to expect further moves by the RBI to relax the CRR and the statutory liquidity ratio (SLR) in order to manage liquidity if global financial conditions continue to deteriorate,” he said.

With some injection of liquidity into the system, after the cut in CRR, the RBI has better flexibility to supply dollars, but this may not be adequate. Some more steps may be required to supply liquidity into the system. The RBI may have to use the two measures it has used so far, namely the cut in CRR and the reduction in SLR from 25 to 24 per cent, said Mr Mohan Shenoi, Treasurer, Kotak Mahindra Bank.

“As the situation in India is different from that in the global markets, a reduction in repo rate may not help. There is no reluctance on part of banks to lend, but there is a problem of liquidity. Banks are currently borrowing between Rs 80,000 crore and 90,000 crore from RBI,” he pointed out.

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