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  Business   Economy  29 Nov 2016  Banks won’t be reducing rates

Banks won’t be reducing rates

Published : Nov 29, 2016, 6:39 am IST
Updated : Nov 29, 2016, 6:41 am IST

This has been done with retrospective effect from September 16 to November 26 on incremental deposits of Rs 3.2 lakh crore.

Reserve Bank of India
 Reserve Bank of India

Mumbai: The Reserve Bank of India has taken the easier and cheaper option by impounding Rs 3,20,000 crore from the banks  through the cash reserve ratio (CRR where the banks don’t get any interest on this amount from the RBI)  mode.

This has been done with retrospective effect from September 16 to November 26 on incremental deposits of Rs 3.2 lakh crore.

The banks have been caught in a bind.  In a report, Care Ratings chief economist Madan Sabnavis says whilst the banks will have to park the entire Rs 3.24 lakh crore after CRR without earning any interest, they would be still paying a minimum of 4 per cent interest to deposit holders on the incremental deposits between September 16 and November 11, 2016.

“In addition, there is a fear of a penalty being imposed in case banks are not able to deposit the same with the RBI,” he  says.

 Another impact is on interest rate transmission. Banks could delay cutting their lending rates given that they have promised at least 3-4 per cent interest rate to savings account depositors even though they will not be receiving any interest.

Saying that RBI’s liquidity-absorbing CRR move was broadly expected Pranjul Bhandari, chief India economist, HSBC in a research report observed that the excess liquidity at banks can, over time, lead to risky investments. So far, the RBI had stuck to the reverse repo window for sucking out liquidity worth Rs 5,00,000 crore, but this route would have run out of fuel soon given the limited holdings of government bonds by the central bank.

From RBI’s perspective, the ‘temporary and incremental’ CRR increase is cheaper and more flexible than other options at its disposal. The lowering of bank lending rates over time, in our view, will depend on repo rate action said, Mr Bhandari.

Noting  the lack of adequate collateral of government securities with RBI, Dr Soumya Kanti Ghosh, chief economic adviser & general manager, economic research department, State Bank of India said led to this step of impounding all excess reserves at zero interest cost.

He said  alternative measures available like cash management bills issued by the government and securities issued by using the market stabilisation route (MSS) bills may have meant better liquidity management.

“Their short tenor would have meant banks having headroom to deal with eventual outflows when the withdrawal limits are unwound,” he said.

Tags: reserve bank of india, state bank of india, rbi