How does CRR cut hit interest rates and bond market?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

Moneycontrol Bureau

The market has reacted positively to RBI's cash reserve ratio (CRR) cut. The bankers, however, do not think this move will reduce base rate.

In an interview to CNBC-TV18, N Seshadri, ED, Bank of India said that with the CRR cut, there would not  any be reduction in the base rate and definitely further rate cut could happen only when the repo rate cut start happening as and when it happens we will definitely look.

The RBI, in its third quarter monetary policy review, has slashed the CRR by 50 basis points (bps) to 5.5% effective from January 28. The cut is expected to infuse Rs 32,000 crore into the system easing the tight liquidity situation.  However, it has left its key policy rates unchanged in its third quarter monetary policy (October-December).

CRR is the fixed portion of the total deposits or the net demand and time liabilities (NDTL) that banks mandatorily have to keep with the Reserve Bank of India. Currently, it is at 6%. This means, for every Rs 100 deposits with the RBI, banks will have to set aside Rs 5.50 as CRR instead of Rs 6.

Seshadri is not optimistic that the credit demand will pick up with CRR. "I would still maintain that the credit growth would be around 15% for the whole year and there is no scope for basically reducing the lending rate with this. But definitely any liquidity release definitely will flow into the credit and there are revenues where we can deploy in either large corporate credit or some sort of an instrument for a short term investment in credit,"he explains.

He sternly says that there would not be any case of reducing interest rate as far as lending and the interest rate should substantially come down.

Bonds

Saying that this policy is almost entirely about liquidity management, Anant Narayan, Standard Chartered Ban, the current projections show that the short fall in the rupee liquidity market before the advance tax outflows can actually go up to as high as Rs 1,80,000 crore or three times Net Demand and Time Liabilties (NDTL) way above the comfort zone of the RBI.

Narayan feels half a percent CRR cut will probably be followed up by some more OMOs as well to inject some liquidity in to the markets. "I don't really think that this half percent cut would mean that the liquidity swings eventually the other way. In fact I would argue that for liquidity management alone we might possibly require another 50 basis points of CRR cut at some stage," he adds.

On rupee, Narayan believes that 49-50 per dollar will be a range where a lot of importers who are not hedged will come in.

"Lot of ECB holders, who have not hedged their external liabilities would probably come and hedge and in that interim period, if we see growth coming back into the equation hopefully the balance of payments will start looking a lot of more relaxed and therefore we will start projecting better things for rupee going forward," he explains.

Nasrin Sultana

nasrin.sultana@network18online.com