Lower deposit growth along with pressure on liquidity due to corporate advance tax outflow has prompted it to cut the cash reserve ratio, the Reserve Bank of India said today.
“Going forward, the wedge between deposit growth and credit growth could widen on the back of the seasonal pick-up in credit demand in the second half of the year. This, combined with outflows on account of advance tax payments and the onset of festival-related currency demand, could accentuate pressures on liquidity over the next few weeks,” RBI said in its mid quarter policy review today.
According to market estimates, additional pressure on liquidity will be around Rs 60,000 crore due to advance tax outflows.
According to latest figures, credit growth, on year-on-year, basis, was 16.7 per cent as on 24 August while deposit growth is 14.1 per cent.
The central bank aims to maintain liquidity deficit in the system in the range of +/- 1 per cent of banks’ net demand and time liabilities which is around Rs 60,000 crore.
Credit demand, especially for home and auto loans, is expected to pick up following banks reducing the interest rates on home and auto loans. With today’s CRR cut, which will infuse Rs 17,000 crore primary liquidity in the system, will further enable banks to cut lending rates.
Pratip Chaudhuri, chairman of country’s largest lender— State bank of India said that the RBI’s decision is not to the extent which we hoped but it’s a welcome step. He added that the bank’s asset-liability committee (ALCO) will meet tomorrow to take a call on the interest rates.
"I believe that the RBI's October policy decisions will depend on economic data", he told television channel CNBC TV18.
In its mid quarter review, RBI kept repo rate unchanged at 8 while reduced the cash reserve ratio (CRR) to by 25 basis points to 4.5 per cent. CRR is a portion of net demand and time liabilities which the banks have to keep with RBI. Banks don’t earn any interest on the CRR balance.
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