Mumbai, Jan. 11: Bankers today asked the Reserve Bank of India (RBI) to make less rigorous use of two money-soaking devices to help them negotiate a severe cash crunch in the financial system.
The banks wanted the central bank to trim the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) — two reserve requirements that the RBI uses to check the amount of money swirling about in the economy.
CRR is that portion of bank deposits which must be maintained with the central bank. SLR is that portion of bank deposits which must be invested in government securities. CRR currently stands at 6 per cent and SLR is placed at 24 per cent.
The Reserve Bank of India — which is due to review its monetary policy on January 25 — has to walk a delicate tightrope as it tries to devise measures to tamp down on food inflation that has topped 18 per cent even as it wrestles with a clamour from industry for more credit to run business operations.
The chief executives of the State Bank of India, ICICI Bank, HDFC Bank, Bank of Baroda, Union Bank of India and Allahabad Bank were present at the customary pre-policy meeting.
We requested the RBI to slash both CRR as well as SLR even though we admit that inflation is a big concern. We see inflation at 7 per cent by the fiscal-end. However, this is 50 basis points above the RBIs estimates for this fiscal, R. Ramakrishnan, chief executive of the Indian Banks Association, told reporters after the meeting.
The Reserve Bank is widely expected to raise key short-term rates in the monetary policy to tame inflation.
The bankers, however, wanted it to cut both CRR and SLR as the banking system is now witnessing a liquidity squeeze with credit offtake starting to soar. At the same time, deposit growth has not kept pace with the demand for credit despite the recent round of interest rate hikes. The rationale of banks is that a cut in CRR and SLR will yield liquidity which can subsequently be on-lent.
However, some observers feel the apex bank may not be keen to bring down CRR as the move may lead to liquidity being infused into the system, thereby stoking inflation.
From October onwards, banks have been borrowing over Rs 1 lakh crore from the central bank through its repo window on an average. Although this has come down marginally over the past few days, bankers complain that liquidity continues to be extremely tight.
The RBIs key policy rates of repo and reverse repo stand at 6.25 and 5.25 per cent, respectively. The repo is the rate at which the RBI provides liquidity to banks against the sale of securities.
Ramakrishnan said the poor deposit growth was a matter of concern for banks. We see the credit growth touching 22 to 23 per cent by the end of the fiscal, he added. The deposit growth is estimated at 17 per cent.