Bankers urge RBI not to raise CRR

Bankers today pleaded with the Reserve Bank of India (RBI) against raising the cash reserve ratio (CRR) further to suck out excess liquidity in the banking system.

Banks do not want monetary actions that have direct implications on interest rates as they are grappling with high deposit and lending rates amid flush liquidity and stagnant credit growth.

Bankers, led by O P Bhatt, chairman of State Bank of India (SBI), today met the RBI Governor Y V Reddy as a part of the central bank's consultation process ahead of the monetary policy review. The RBI will undertake the second quarterly review of the monetary policy on October 30.

The RBI has raised CRR, the proportion of deposits banks need to keep with the central bank, by 200 basis points since December 2006 to 7 per cent as its interventions in the foreign exchange market resulted in infusion of rupee liquidity, which has the potential of fanning inflationary expectations. The RBI has bought $30.24 billion of foreign exchange during December 2006-August 2007.

The other bankers who accompanied SBI's Bhatt were K V Kamath, managing director and CEO of ICICI Bank, A K Khandelwal, CMD, Bank of Baroda, T Narayanasamy, CMD, Bank of India, and Sanjay Nayar, CEO, Citibank India.

There are expectations that the RBI would either raise the ceiling on bonds the government can issue under the Market Stabilisation Scheme (MSS) or raise CRR for absorbing liquidity.

Liquidity is very high in the banking sector and the RBI absorbed Rs 57,480 crore through reverse repo auctions today, about twice the amount it sucked daily in the last week of September 2007.

Bankers also urged the RBI to resume payment of interest on CRR balances. Looking at the blunt character of CRR, bankers said CRR should not be increased as it added to the cost of banks.

After the conclusion of the meeting, SBI's Bhatt told reporters that the international situation (tight liquidity in the aftermath of the US subprime crisis and slowing US economic growth) came up for discussion. The domestic credit growth, which remains subdued over the same period last year, was also in focus.