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CRR cut by 50 bps; Bankers don't see cheap loans soon

Published on Mon, Oct 06, 2008 at 18:15 | Source : CNBC-TV18

Updated at Wed, Oct 08, 2008 at 09:57

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CRR cut by 50 bps; Bankers don't see cheap loans soon

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The Reserve Bank of India, or RBI, has cut the cash reserve ratio, or CRR, by 50 bps to 8.5% with effect October 11. The cut will infuse Rs 20,000 crore into the system.

CRR is the portion of funds that banks have to park with the central bank.

"The CRR cut is ad hoc and temporary in nature. Liquidity management will be priority amid global uncertainty. The major priority of policy will be to anchor inflation expectations. We will continue to review the CRR situation on a continuous basis," it said.

According to RBI, the central banks' recent operations increased local, forex, and money market volatility.

So, what are bankers making of this rate cut?

Deepak Parekh, Chairman, HDFC finds the news of the 50 bps CRR cut by the Reserve Bank of India with effect from 11 October a great relief as there is no liquidity in the system. He said that the liquidity had totally dried up in the last three-four days with a lot of borrowers but no lenders and that this move has released about Rs 20,000 crore liquidity into the system. However he said that he had anticipated that the RBI would infuse some liquidity into the system as all Central banks have done that.

Parekh hopes that banks would be willing to lend and money would be available now that liquidity is infused in the system. He said, "It is a temporary measure but if things continue and there is total lack of trust and total lack of liquidity, the temporary measure may become permanent measure. But, perception has to change, confidence has to come back to the system and that is what is most important today. The trust and perception is disappeared from the system." He feels this move by the RBI would certainly infuse some reliability and trust into the markets."

Chanda Kochhar, Joint MD and CFO, ICICI Bank said, "I think I must complement the Reserve Bank of India (RBI) that it is a very proactive step and a very welcome step. The RBI itself clearly has mentioned that this is an ad hoc measure and I think we have to view it as ad hoc in both ways; firstly how much of the liquidity is required in the system and secondly what impact it will have on inflation." She expects the RBI to continue to monitor both the ends and so cannot determine whether it is enough or more. However she said that in the light of the current scenario, which is so very volatile, it is an appropriate step.

Kochhar still has a lot of faith in the basic fundamentals of the Indian economy and said that some of the strong fundamentals would still continue to remain strong and the investment pipeline would continues to be there. However, she added that one needs to watch out for the inflation trend.

Yogesh Aggarwal, Chairman, IDBI said, "It is an extremely welcome step by RBI and the RBI has heeded to what the bankers have been requesting for quite some time in view of the very tight monetary conditions in the market. This is a very strong signal from the Reserve Bank that they are still reading to listen to the banks and respond to the markets situation as it develops even while managing their concerns on inflation."

MS Sundara Rajan, Chairman and Managing Director, Indian Bank believes that it is a first step and is going to bring about Rs 20,000 crore. "As far as my bank is concerned, about Rs 300 crore of liquidity would be released."

"The market is heating up every day and rates are also moving. To a certain extent, it will help to cool the market. If left to myself, I may look out eagerly for another 50 bps, which will make me more comfortable. But, the Governor has to watch the market. Here it also says that it is an ad hoc. So, I would just eagerly look out for the monetary policy meeting that is going to take place and what steps he is going to take," Rajan added.

SA Bhat, CMD, Indian Overseas Bank feels this move would ease liquidity to a large extent. However, he does not believe that this would be sufficient to meet the needs of the overall economy as of today because as there is a huge credit demand, which this 50 bps cut would not be able to satisfy. He sees further CRR cuts by the RBI if the inflation numbers subside.

Bhat does not see it affecting the dollar availability in Indian markets. He said, "Removing some restrictions on ECB and NRI money flowing into India would be a very good thing to happen. NRI deposits that are flowing as far as rupee is concerned are artificially at a very low rate. If they are able to jack up the rate and make it equivalent to the resident ordinary citizens it would be a welcome step that would enable inflow of money, which otherwise is presently still getting passed into the US rather than coming to India despite the fact that the US economy is in turmoil."

Will loans get cheaper now?

Parekh feels it is a little early to predict whether rates would come down but said the rates would come down if there is liquidity. He sees a good chance of normalcy returning to the financial system in the next few days.

Kochhar expects the immediate impact to be on the call rates and the overnight rates. She believes it would take sometime before other rates or other borrowing or lending rates start declining.

Bhat expects this move to bring down call money rates, and once that comes down he said CD rates would come down to some extent, though not drastically.

IDBI, or Industrial Development Bank of India, said, "Call rates are likely to drop but may not go down to 9%. The move is unlikely to change corporate lending rates. One must remember that the situation is still evolving and there is still a lot of stress in the system."

Also read: Banking system faces liquidity crunch: Fin Min Sources