The immediate provocation to Reserve Bank of India (RBI) to impose 100 per cent Cash Reserve Ratio (CRR) on incremental deposits from September 16 can easily be linked to the instability in exchange rate, making the rupee touch an all-time low. With the longer yield falling lower than the shorter ones and the benchmark dropping 72 basis points below its coupon led to a huge widening of the differential between domestic bond and US bonds, which in turn resulted in an exodus by foreign institutional investor funds from the country. This led to a sharp fall of the rupee against the dollar.
To retain at least status quo, the RBI decided to suck 100 per cent of the incremental liquidity that came into the banking system. The CRR stipulation is effective on the additional demand and time liabilities (DTL - in effect, deposits from public) created since September 16 last. The surge in bank deposits post demonetisation is about Rs 4.5 lakh crore to Rs 5 lakh crore. The additional CRR requirement is about Rs 8 lakh crore.
With the additional deposit of Rs 5 lakh crore, of which the majority is in the shape of low-cost deposits, it was expected that the banks would, corresponding to the fall in marginal cost of funds, reduce their lending rates. A few did so. But now with the additional CRR, banks have again become fund-starved and are not able to lend, much less at cheaper rates.
It should have been the other way around: With the fall in borrowing cost, industries and business would have earned more profit. This would have brought more FII investment and made the rupee stronger.
With the economy becoming cashless and prosperous, broader markets in the country would outperform their counterparts abroad. But this may take time. That is all. The RBI should have waited for that than taking away the windfall reward (for hard work in these tough times) from the banks. For the time being, exchange rate issue could have been attacked by the central bank, with the other measures available with it such as market intervention.
P D Sankaranarayanan
More From This Section
Thiruvananthapuram
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201 • E-mail: letters@bsmail.in
All letters must have a postal address and telephone number