The Reserve Bank of India (RBI) hiked the cash reserve ratio (CRR), the percentage of cash deposits that banks have to maintain with RBI – to a maximum of 100 percent.
In the latest episode of Indianomics, SBI Chairman Arundhati Bhattacharya, says that these are extraordinary times that need need extra ordinary measures.
She hopes that this is a temporary measure, till the time RBI makes arrangements for market stabalisation bonds or some other means for remunerating banks.
She further said that liquidity is still high in the system. Credit demand is very low.
She also said that rate of inflows is far more than the demand and that is causing the requirement of reverse repo.
On the deposits that the banks have received post the roll-out of the demonetisation scheme, she said around 10 percent to 15 percent will remain in the system.
Below is the verbatim transcript of the interview to Latha Venkatesh on CNBC-TV18.
Q: As a banker, what is the impact on banks?
Srinivasan: We just stepped back and see why Reserve Bank of India (RBI) has gone ahead with this measure. If you look at the excess liquidity parked with RBI, in terms of reverse repo, it is almost Rs 5.5 lakh crore as of now and if you look at the deposit accretion of banks, it looks like this is going to continue at a reasonable pace even over the next couple of weeks.
RBI's stock in terms of how much they can absorb in terms of reverse repo is something close to Rs 7 lakh crore. So clearly, if that number is likely to get breached over the next few weeks and what does the RBI do, they need to borrow clean from the banks to absorb the liquidity, which is with banks and that is what they have tried to do clearly saying that I have a limited appetite or my appetite in terms of borrowing through reverse repo is nearing its limit.
Now how do I absorb the excess liquidity, which a system has? They have estimated that need to absorb about Rs 3 lakh of liquidity from the system and then keep the residual under reverse repo. That is what they have done. So how do I absorb Rs 3 lakh crore? You have multiple options and they have gone with the option, which is possibly the cleanest in terms of trying to say just keep the money with us -- so Rs 3.25 lakh crore to be kept with the RBI. Doesn’t have much impact in terms of immediate short-term liquidity because we already have Rs 5.4 lakh crore with the RBI in reverse repo out of which clearly Rs 3.25 lakh goes back to RBI.
So overall I would think, this is a liquidity management measure, RBI had to mop up this liquidity in some form and they have decided to do through incremental CRR.
Q: RBI has used that instrument, which better fix them most and hurts you most as a banker even if it is only for 15 days maybe or 30 days?
Srinivasan: There is a profit and loss (P&L) impact.
Q: How much may have been for Axis Bank -- the deposit accretion up until November 11, what is your approximate CRR?
Srinivasan: Let us not go into individual bankwise. I think you would be placing it in reverse repo price of around 5.75 or whatever the number is and whatever number which you have to put back with RBI as incremental CRR is not going to earn you anything and to that extent, there is a P&L impact.
Q: Will there also be an impact on the bond markets? We saw yields crashing from 6.6-6.7 all the way to 6.2, I even saw 6.12 on Friday morning, what is the impact on bonds on Monday?
Chopra: I think the bond markets -- both at the short end and the long end -- will react somewhat to this event. If you look at the way the markets are rallied over the last two weeks, essentially on two key drivers. One was clearly built around this big liquidity build up in the banking system, which eventually would have led into incremental buying of government bonds. So that was one driver.
The second was also in anticipation of much more dovish stance from RBI leading to rate cut as early as December. So one leg of this rally clearly is going to get tempered. The expectation that the Central Bank will allow the policy rate or the overnight rate will fall below even reverse repo is going to be tested.
So this measure in my view clearly will lead to a little bit of a retracement on Monday. Possibly you could see a very sharp knee-jerk reaction early in the morning at 12-15 basis points (bps) hardening of the 10-year yield but end of the day there would be some bit of value buying coming in and I would expect the markets to end closer to about 6.32, which is about 7 basis point or more from where we closed on Friday.
For entire discussion, watch accompanying videos...