Most bankers want further cuts in the cash reserve ratio (CRR). This was revealed when the Reserve Bank of India (RBI) took a poll among bankers during the customary pre-policy meeting held on Friday. The RBI’s second-quarter monetary policy review is due on October 30.
“Most of us voted for a CRR cut,” said Pratip Chaudhuri, chairman of State Bank of India (SBI). He said a reduction in CRR would have greater impact than a policy rate cut.
CRR is the amount of funds that banks have to keep with the RBI. “The position is that a CRR cut reduces the cost directly, so that is preferable,” said K R Kamath, chairman and managing director of Punjab National Bank.
During the pre-policy meeting, the RBI told bankers that they should effectively pass the benefits of monetary easing on to their customers.
“The RBI asked that if the rate of interest is brought down, will there be a transmission. We said we will try for that,” said Kamath.
The central bank had cut CRR by 50 bps in the mid-quarter monetary policy review in September. It said the move was to ensure adequate liquidity in the system in the backdrop of advance tax outflows and start of the festive season. It was also to complement the government’s reform initiatives.
SBI, India’s largest lender, had reduced its base rate soon after the RBI cut CRR in September. “We also mentioned that the last time the CRR was cut, most banks had given effect to monetary policy transmission,” said Chaudhuri. Bankers who attended the meeting said central bank was concerned about deteriorating asset quality and slowing credit growth.
According to market participants, the chances of further monetary easing on October 30 are brighter as the government has unleashed a number of reforms to earn credibility and investor confidence.
However, high inflation might play spoilsport and the central bank could find it difficult to ease its monetary stance.
Recently, C Rangarajan, chairman of the Prime Minister’s economic advisory council said RBI would be able to change its stance only if its saw definite signs of inflation cooling.
