RBI may chart CRR cut roadmap

The Reserve Bank of India may announce a time-table for a phased cut in banks' cash reserve ratio (CRR), from the existing 5 per cent, in its quarterly policy review on Tuesday. The cut, however, may not take place immediately.

Senior bankers expect the RBI to reiterate its intent of bringing down the CRR to zero in a phased manner, and prescribe a medium-term time-frame for this in the quarterly review.

This is significant as phasing out of CRR is one of the prerequisites for rolling out capital account convertibility (CAC).

Following the recent amendment to the Banking Regulation Act, the floor for CRR has been brought down to zero from 3 per cent, and the RBI has also stopped paying interest on CRR to banks.

Commercial banks will lose about Rs 1,700 crore as interest on CRR. However, the CRR cut may not take effect immediately as the RBI has allowed banks to raise funds from the overseas market in the form of hybrid capital.

The RBI had last hiked CRR in two stages, by 25 basis points each, to 5 per cent in September and October 2004.

At present, the RBI absorbs around Rs 42,000-50,000 crore from the system daily through its reverse repo window. However, liquidity is expected to tighten in the busy season, beginning September, with credit demand picking up.

Besides, the bulk of the government borrowing programme has not yet been completed. The corporate credit demand from the infrastructure sector, including special economic zones, could be over Rs 35,000 crore.

Bankers feel that since the demand for credit is from productive sectors,the additional liquidity might not result in high inflationary expectations.

With the bond yields going up, there are not too many takers for government securities in the market. The government needs to borrow funds from the market to meet certain commitments.

Under the special deposit scheme which has already been matured, the Employees Provident Fund (EPFO), the largest subscriber to the scheme, needs to be paid around Rs 72,000 crore.

It also needs to redeem the recapitalisation bonds that have been issued to various public sector banks. Senior bankers expect the liquidity to tighten in the medium term as there is a decline in foreign exchange inflows with the global rates firming up.

"The RBI may make a commitment to release liquidity if the need arises. In any case, it can always absorb excess liquidity by issuing treasury bills under the market stabilisation scheme (MSS)," says a banker.