The Reserve Bank of India should continue with the interest free cash reserve ratio for effective monetary and liquidity management, Assocham said.
The industry body came to the above conclusion after ascertaining the views of stakeholders including industries, banks, and economists.
State Bank of India Chairman Pratip Chaudhuri’s views last week on cash reserve ratio led to a strong response from the RBI Deputy Governor K .C. Chakrabarty .
CRR is the portion of deposits that banks are obliged to set aside with the central bank. Currently, it is at 4.75 per cent of deposits i.e. for every Rs 100 deposit that a bank raises, it has to park Rs 4.75 in interest free deposit with RBI.
Banks, which collectively had deposits aggregating Rs 65 lakh crore as at July-end, do not earn interest on about Rs 3 lakh crore of funds locked up as CRR, said Assocham.
The industry body, in a statement, said a large section of stakeholders, including prominent bankers, want CRR to stay. It is one of the several key monetary tools by which the RBI drains excess liquidity from the system when it wants to follow a tight money policy to rein in high inflation and vice versa.
Those advocating CRR phase-out are of the view that it drains substantial funds out of the banking system, thereby imposing a cost on borrowers. Moreover, it is viewed as an idle asset.
Further, there are several other financial intermediaries like non-banking finance companies, insurance companies, and pension funds which are not subject to CRR and hence have an advantage.
However, Assocham observed that a strong and healthy monetary policy mechanism is a prerequisite to afford financial stability and quick response to any distortion.
“The case for continuation of CRR interest free is very valid as well as indispensable. It has worked well and perhaps is not an issue that needs any revisit,” it said.