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The RBI has already initiated various measures to provide liquidity to banks over the last few quarters. It has, therefore, left the repo rate and CRR unchanged while enhancing the limit for export credit refinancing. The stock market has not taken this move well with BSE Bankex declining 3.3 per cent.
If one considers the liquidity supports given by the RBI in the recent past, a further cut in CRR is not warranted. In the annual credit policy, the RBI increased the borrowing limit through the Marginal Standing Facility from one percentage point to two percentage points.
This window, where banks have to borrow at repo plus one percentage point, has been mostly unutilised by banks (given that the overnight call rates are close to the repo rate).
The existing limit for export credit refinancing facility (standing liquidity facility) also is yet to be fully tapped by the banks. Additionally, the central bank has enhanced this limit from 15 per cent to 50 per cent of the eligible export credit.
This would also provide liquidity support for the banks and encourage them to provide more export credit. This is a longer-term liquidity support for banks unlike the repo window and marginal standing facility which are for short-term. Given that the refinancing is also at 8 per cent rate, banks which have enough liquidity may not use this facility.
Other tools
Over the last one month, the funds borrowed from the repo window were on average 1.5 per cent of the deposits. The RBI's comfort level is -1 to +1 per cent of net demand and time liabilities.
The RBI may have been optimistic that it can meet the excess fund requirement through open market operations instead of cutting the reserve ratio. The central bank has already undertaken Rs 43,000-crore worth open market operations (bond buyback) this fiscal.
With banks cumulatively holding around Rs 3.8-lakh crore worth of excess SLR securities on their books, bond buybacks route is the easier way of infusing liquidity.
However, CRR cut would have aided the margins as compared to the above-mentioned facilities where the cost of borrowing is 8-9 per cent. To that extent the market is disappointed.
Outlook
Post announcement there has been decline in government bond prices. Nevertheless, the gilt prices are still above the March-end levels.
Therefore, banks may show treasury gains during the current quarter. The RBI's open market operations may also support the yields going forward.
While there is a 20 basis points rise to 9.3 per cent in rates of three-month certificate of deposits, this may partly decline as the banks can now utilise the 180-day export refinancing facility at 8 per cent.
Going by the Overnight Index Swap, the market is discounting another 25 basis point decline in rates over the next one year.
Until Sunday, it was discounting a 50 basis points rate cut.
The central bank's action to not cut CRR appears to be justified given that the credit growth remains subdued. Once the demand for credit picks up, the RBI may cut CRR to infuse permanent liquidity.
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