Reserve Bank of India should cut the cash reserve ratio by 50 basis points in its Annual Policy to ease the liquidity pressure, say bankers.
In a pre-policy consultation meeting with the central bank top brass, bankers represented that in view of the tight liquidity situation the RBI should cut the CRR.
CRR is the slice of deposits that banks have to park with the RBI. Currently, this reserve ratio is at 4 per cent of deposits. A reduction in CRR will release liquidity and help banks reduce lending rates.
The RBI is scheduled to announce its Annual Policy on May 3. In the run-up to the Policy, the central bank is holding consultations with various stakeholders.
S. S. Mundra, Chairman and Managing Director of Bank of Baroda, said: “We have asked for a 50 basis points CRR cut. The deposit growth has been slightly lower than the RBI’s projection (of 15 per cent growth in FY13). Though liquidity was tight till now, it should improve.”
Besides the CRR cut, bankers also want the repo rate (the interest rate at which banks borrow short-term funds from the RBI) pared. However, looking at the present liquidity situation there was more emphasis on CRR cut, Mundra said after the meeting.
In its mid-quarter review of the monetary policy on March 18, the RBI had cut the repo rate by 25 bps to 7.50 per cent to help revive economic growth. However, it warned that higher inflation and a wide current-account deficit left limited room for any further rate reduction.
Bankers divided
However, Vijayalakshmi Iyer, Chairperson and Managing Director, Bank of India, said, “It (the opinion) was divided (on expectations of CRR)...some (bankers) wanted a CRR cut while others said OMO (open market operations) could be conducted to overcome the liquidity tightness.”
The RBI conducts OMO by buying and selling government securities in order to expand or contract the amount of money in the banking system.
Further, the BoI chief said that bankers were concerned that there hasn’t been much off-take in credit from the corporate side. “Also, there is a slowdown in the consumption demand… In this backdrop, all of us felt that there has to be pick-up in the confidence levels in the economy,” Iyer added.