Economists divided on CRR cut in RBI policy

In the run-up to the Oct 30 review, some feel a repo cut makes sense

While bankers have demanded the Reserve Bank of India (RBI) cut its cash reserve ratio (CRR) specification, economists are divided about what is likely to happen.

Business Standard spoke to 10 economists and five did not expect a CRR cut, as they felt the liquidity position was comfortable. CRR is the proportion of their funds that banks have to keep (free of interest) with RBI. It is currently 4.5 per cent of their net demand and time liabilities. Those who expected a CRR cut at RBI’s second quarter review of the monetary policy on October 30 said this would help bring down lending rates.

“With FY13 growth looking set to slow below RBI’s 6.5 per cent (expectation), we expect RBI to cut CRR by 50 basis points (bps), to bring down lending rates,” said Indranil Sen Gupta, India economist at Bank of America Merill Lynch, in his report on Monday.

He says India is the only BRICS country (Brazil, Russia, China and South Africa being the others) where lending rates are at their 2008 peak. “Unless lending rates come off, FY13 growth will find it very difficult to do our 5.6 per cent growth forecast, let alone 6.5 per cent,” said Sen Gupta.

Last month, RBI had cut CRR by 25 bps. However, State Bank of India (SBI) was the only bank to cut its base rate by a corresponding 25 bps, to 9.75 per cent. “We are entering a busy season and we expect bank credit to pick up. There should be adequate credit available and at a low cost. If you cut CRR, it is possible for banks to bring down the lending rates,” said Brinda Jagirdar, general manager (economic research), SBI.

According to Sen Gupta, the lending rate of banks should drop further by 25-50 bps by December. However, some economists feel a cut in the repo rate (at which RBI lends to banks) would be better. “At this point, a cut in the repo rate will result in more effective monetary transmission, compared with a CRR cut. There is still worry that another 25 bps of CRR cut will not result in a sufficient injection of liquidity to counter the gradually increasing tightening over the rest of FY13,” said Saugata Bhattacharya, chief economist, Axis Bank.

RBI had cut the repo rate by 50 bps in April. It is now eight per cent. CRR was at six per cent at the beginning of the calendar year and was brought down to 4.5 per cent in three tranches. The cuts in CRR had helped inject liquidity worth Rs 97,000 crore into the system. Today, banks borrowed Rs 61,180 crore under RBI’s Liquidity Adjustment Facility. In the past month, the daily average borrowing by banks under the liquidity adjustment facility has been a little over Rs 50,000 crore.