Bank shares gained on Tuesday on the buzz of a reduction in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) during its mid-quarter review scheduled next Monday. The BSE Bankex index gaining 1.9 per cent and was the second top gainer among sectoral indices.
While State Bank of India rose two per cent to close at Rs 2,206, private sector lender ICICI Bank was up 1.6 per cent at Rs 838 and HDFC Bank gained 1.85 per cent to close at Rs 549. Among others, Punjab National Bank and Canara Bank rose four per cent, Union Bank rose 3.5 per cent and IDBI Bank was up 2.6 per cent.
Banking stocks gained after State Bank of India’s Chairman Pratip Chaudhuri said he expected a 100 basis points (bps) CRR cut in the upcoming policy review. CRR is the proportion of deposits that banks have to park with RBI as cash for which they do not earn any return.
“We expect RBI to cut CRR by one per cent. It will ease liquidity significantly and lower interest rate. It will recharge lot of investors’ sentiments, the economy and also stock markets. We have made a request but it for RBI to take a call. Repo rate cut is meaningless because it is more symbolic and not very substantial,” Chaudhuri said. RBI has reduced the CRR by 125 basis points since January to reduce acute liquidity shortage. The liquidity deficit in the system, however, has come down in last couple of weeks, from a high of Rs 1.2 lakh crore to Rs 80,000 crore. RBI Deputy Governor Subir Gokarn recently said liquidity is coming back to the comfort zone of the central bank, which is +/- 1 per cent of net demand and time liabilities or around Rs 65,000 crore.
Interestingly, SBI’s demand for CRR cut was also supported by the government, owner of the public sector banks.
“Banks are saying the best way is to cut CRR. This is also appropriate from the point of view of Basel-III. Banks can pass on the benefits to customers. As owner of public sector banks we can say banks would welcome a one percentage point cut in CRR, but ultimately the decision will be taken by the Reserve Bank of India. Unless interest rates are lower, there is difficulty in having higher growth rate. Today higher interest rate is feeding into inflation,” Financial Services Secretary D K Mittal said.
The central bank has been infusing liquidity through open market operations to offset the liquidity drain due to a large government’s borrowing programme and intervention in the foreign exchange market to support the weakening rupee. The central bank is also expected to cut the key policy rate or the repo rate by 25 bps in the policy to support growth. In its recent communication, RBI has said softening of crude oil prices and slowdown in growth gives scope for easing interest rates. In April, the central bank reduced repo rate by 50 bps — for the first time in three years.
