The Hindu Business Line : CRR cut may not impact lending rates: Bankers

Bangalore, Oct. 10 The Reserve Bank of India’s extraordinary intervention through a record 150 basis points cut in the Cash Reserve Ratio (CRR) is unlikely to have to any impact on lending rates.

The cut in CRR or cash reserves maintained by commercial banks with the RBI as zero-interest balances was expected to infuse liquidity of almost Rs 60,000 crore into the banking system.

The cut came as many of the banks were found short of liquidity as foreign institutional investors pulled out of domestic equity and debt markets.

FII outflows

Since the beginning of this week, FIIs liquidated $906 million (Rs 4,500 crore) of Indian financial assets. Since the beginning of this financial year, the pull out has totalled $6 billion (about Rs 27,000 crore).

Bankers said that the CRR reduction was to offset the liquidity impact of the pull out. The pull out has resulted in a compression of rupee liquidity in the banking system. This compression was partly responsible for triggering the liquidity crunch in the banking system. What also worsened the liquidity situation in the banking system was the presence of refining companies for purchasing dollars to meet their import payment obligations.

Reserve money

The series of CRR hike beginning from 2007 were intended to plug reserve money expansion or money created through RBI’s intervention in the foreign exchange markets as a result of FII/hedge fund inflows. The compression in the reserve money was on account of depletion in foreign exchange.

Bankers said that the entire CRR intervention was essentially intended only for tiding over the liquidity situation in the banking system. As a result, there was likely to be little impact on lending rates.

‘No change in policy rates’

The Chief Economist of Bank of Baroda, Dr Rupa Rege Nitsure, said, “There has been no change in policy rates, so lending rate reductions are still remote.”

Besides, she added, unlike the European situation where inflation ranged between 2.5 and 5 per cent, domestic inflation in double digits still did not warrant any big reduction in lending rates.

Moreover, despite the current high lending rates, credit growth in the country continued to remain robust. Credit growth was currently about 26 per cent on a year-on-year basis. Incremental credit deposit ratios for latest reporting fortnight was a 140 per cent.

Bankers said that the most of the credit growth was currently from the productive sectors of the economy including the infrastructure projects under implementation.

The consequent liquidity pressure was evident from the high spreads between sovereign and Triple A-rated corporate debt papers. These spreads were currently over 300 basis points, despite Friday’s CRR reduction. Besides, with the beginning of the peak season credit off take was likely to pick up further in the coming weeks, the bankers said.

Normally the peak season is a period of also high farm credit demand. This was also the major reason that bankers have been prompted to chase deposits for augmenting working resources. Consequently, bankers said that more liquidity support interventions were expected through part redemptions of market stabilisation scheme securities (MSS). Currently, the outstanding MSS securities with the RBI are about Rs 1.74 lakh crore.

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