Says move will help bring down base rate, release more funds
A cut in Cash Reserve Ratio will be much more effective in bringing down lending rates than a repo rate cut, said State Bank of India Chairman Pratip Chaudhuri.
A strong votary of abolishing the CRR, the SBI chief said he will bring the base rate down by 20 basis points, if the Reserve Bank of India cuts the CRR by 100 basis points. Base rate is the minimum lending rate below which banks cannot lend.
The RBI will review key policy rates in its annual policy meeting scheduled on May 3.
Currently, the CRR (the slice of deposits that banks keep with RBI) and the repo rate (the interest rate at which banks borrow short term funds from the RBI) are at 4 per cent and 7.50 per cent, respectively.
“Repo rate has very little or insignificant impact on the cost transmission. The only thing that can significantly bring down the base rate is the CRR. “Looking at the inflation numbers yesterday, I am encouraged to recommend a 1 per cent (100 basis points) reduction in CRR,” Chaudhuri said.
Also, a CRR cut will release more liquidity into the banking system. “The banks will be less desperate for deposits so it (liquidity) will have a more benign impact on the interest rates,” the SBI chief said.
Chaudhuri, who mooted the idea of banks being allowed to introduce ultra-short term deposits of three days maturity, said there will not be any liquidity management issues if such a product is introduced.
Pointing out that absence of such a product is making banks uncompetitive, Chaudhuri reasoned that if banks can take care of seven-day deposits, then they can take care of three-day deposits too.
The SBI chief said that he has explained the new idea to the RBI top brass.
In any case, there is no rule saying that customers cannot withdraw money before the seven-day maturity period, he said. “So, if a seven- day deposit is stable then three-day deposits will also be stable.”
Chaudhuri pointed out that the entire savings bank deposits of banks constitute 25 to 40 per cent of their total deposits and they are withdrawable on demand.