The Hindu Business Line : Depreciation of securities

The Reserve Bank of India (RBI) has come out with some relief for the banks facing the prospect of depreciation in the values of securities due to a possible rise in interest rates. Bankers may not be satisfied as it falls short of their expectations. But the apex bank cannot compromise on its dharma of maintaining prudential standards. What it has proposed will minimise potential losses in the future. Banks should undertake the reshuffling of their portfolios among the three stipulated categories without delay. The RBI is no longer inhibited from raising the interest rate for fear that it might hit the banking system badly.

The latest surge in inflation is a pointer to an increase in the bank rate. Banks should start moving towards a reduction in their excess investment in securities by lending in a big way, subject, of course, to prudential considerations.

After meeting the Cash Reserve Ratio (CRR), incremental deposit growth should be matched by incremental advances since Statutory Liquidity Ratio is already provided for the former in the excess holdings of securities. Such a course of action on the part of banks may leave a problem with the RBI in selling freshly-issued securities under the Government's borrowing programme.

However, it can always use the CRR to control money supply. The net inflow of forex and the consequent need to mop up excess liquidity may not be on the scale witnessed so far as arbitrage opportunities have been closed to a large extent.

A. Seshan

Mumbai

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