Industry and banks welcome slash in CRR, want repo rate cut
Reduction in Cash Reserve Ratio to 5.5% will help ease liquidity situation in banking system, say experts
Industry, corporate houses and the banking sector all hailed the Reserve Bank of India’s (RBI) move to cut the Cash Reserve Ratio (CRR) by 50 basis points to 5.5 per cent on Tuesday. According to the industry, the move would help ease the liquidity situation in the banking system, which has been tight since November 2011.
This is the first time since January 2009 that the RBI has cut the CRR (the reserves that all commercial banks have to maintain as a percentage of their deposits with the RBI). Between March 2010 and October 2011, the apex bank had raised interest rates 13 times.
“This gives a clear signal that the RBI has recognised the challenges to growth owing to a weakening demand and started addressing the problem after successive increases in the headline interest rate cumulating to 375 bps,” Chandrajit Banerjee, Director General of Confederation of Indian Industry, said reacting to the RBI’s move. “While the CII agrees with the outlook of the RBI, we believe that sooner than later, it needs to start reducing the repo rate as well in order to start the investment cycle, which has weakened.”
Welcoming RBI decision to cut CRR, which in turn would rein in inflation, Secretary General, Associated Chamber of Commerce and Industry, DS Rawat said, “RBI’s move will release Rs 32,000 crore and help fund viable projects held up due to liquidity crunch.”
“The focus is now shifting from controlling inflation to restoring growth momentum as liquidity in the system tightens further,” However, the risk to inflation and inflation expectations continue to be high forcing the RBI to not change key interest rates,” Rawat added.
“Injecting more liquidity in the system will enable India Inc undertake capacity expansion and modification, which were put on hold due to a variety of reasons, including squeeze in liquidity,” SC Aggarwal, Chairman, SMC Securities, a Delhi-based consulting firm, said welcoming RBI’s move to cut CRR. He added that in the next review of monetary policy, the RBI should pay heed to popular public opinion and bring down the repo rate at minimum level of 8.00 per cent to serve growth and further moderate inflation.
“We are positively surprised by the RBI decision to cut the CRR by 50bps to 5.5% with immediate effect. We were hopeful that the RBI would consider a step forward due to the severe liquidity crunch in the system as banks collectively were borrowing 1.2-1.5 lakh crore from the RBI everyday,” Kislay Kanth, Senior Director, Research, of MAPE Securities, a Bombay-based consulting firm said.
According to Kanth, the RBI’s step (of reducing CRR) should now be backed strongly by the Centre in taking some bolder steps on the reform front as well as expenditure cuts to rein in fiscal deficit since lack of reforms and bloating fiscal deficit would surely take the wind out of the rebound that the markets have seen.
Kanth felt that the government should lend priority to foreign direct investment, Goods and Service Tax, and reforms in power and coal sectors to set the tone and direction of the market in the next three to six months.
“The budget for FY2013 will also become crucial since FY2013 growth expectations, on which markets have become very pessimistic, can again look up over the next two to three months,” Kanth added
Samiran Saha is Assistant Editor, Business with Tehelka.
Editing by Aninda Dey