Cut in cash reserve ratio unlikely, for now

RUN UP TO THE CREDIT POLICY

The easing of the liquidity tightness has provided the Reserve Bank of India (RBI) the comfort to side-step the demand for liquidity infusion through a cash reserve ratio cut when it announces the 2006-07 annual credit policy on April 18.

But analysts said the central bank might have to finally cut CRR a few months down the line when it would review the policy as a sizeable increase in demand for credit from infrastructure is expected to emerge.

Banks' ability to avail of resources from the RBI 's liquidity adjustment facility is also getting contracted as the level of SLR (statutory liquidity ratio) holdings fall closer to the statutory minimum of 25 per cent. Banks use their SLR holdings as collateral to avail of the RBI's repo window, which infuses short-term liquidity.

Bankers said the expected drop in growth in credit in 2006-07 might not translate into a comfortable liquidity position. The percentage growth in credit may fall, but absolute growth can still be close to that witnessed in 2004-05 and 2005-06.

The increase in credit in 2005-06 was over Rs 342,000 crore (32 per cent year-on-year) against nearly Rs 255,000 crore (31 per cent) in 2004-05. Growth in credit in 2006-07 can be slower compared with the previous two years', but in absolute terms, it is still expected to be closer to that witnessed in 2005-06.

Excess SLR investments have dropped to less than Rs 150,000 crore at the end of March 2006 from Rs 260,582 crore in March 2005. In percentage terms, SLR holdings fell to 31 per cent from 38.5 per cent in March 2005 and 41.3 per cent in March 2004.

RBI Deputy Governor Rakesh Mohan had last month said as the system moved to maintaining SLR securities at the statutory minimum levels, liquidity provision would become more difficult unless the instrument set was widened to facilitate market players to even out their liquidity mismatches.

The RBI may decide to include more securities in the basket that is eligible to seek liquidity support under the LAF system.

Analysts said the RBI had been increasing liquidity in the system by sterilising the foreign exchange inflows but this would not be sufficient in the long-run to keep the liquidity situation comfortable.