Bankers express concerns over liquidity to RBI
Bankers, worried over the lukewarm pace of deposit growth, have expressed concerns over the effect of sharp rate increases on credit growth at a meeting with the Reserve Bank on Tuesday.
January 12, 2011 / 08:50 IST
Bankers, worried over the lukewarm pace of deposit growth, have expressed concerns over the effect of sharp rate increases on credit growth at a meeting with the Reserve Bank on Tuesday.
"Let's see how inflation will move because so far the inflation is very high, specially food and even non-food. If the rates go up, definitely it will impact credit (growth). Right now, credit demand is very robust," said Allahabad Bank Chairman and Managing Director JP Dua after attending the meeting."So, we have expressed these concerns to the Reserve Bank."Select bankers met the Reserve Bank of India (RBI) Deputy Governor Subir Gokarn at a customary pre-policy meeting to give their views on macro-economic factors, including credit and deposit growth, interest rates, inflation, and economic growth.Banks have raised deposit rates by up to 100 basis points recently to garner more resources to fund robust credit demand.However, deposit mobilisation has not picked up despite banks increasing retail rates, forcing banks to tap wholesale deposits at sharply higher rates.On December 27, one-year certificate of deposit rate had risen to 9.75%, its highest since November 28, 2008."We told the RBI that there is a huge reliance on bulk deposits because deposit growth is not picking up despite the deposit rate hikes. So, in order to sustain the credit growth, the RBI should maintain adequate liquidity," said another banker who attended the meeting.Bankers requested the RBI to cut banks' cash reserve ratio (CRR) and statutory liquidity ratio (SLR) to infuse cash into the system.CRR is the percentage of total deposits banks must keep with the central bank and is at 6 percent now. SLR is the percentage of deposits banks need to invest in mostly government bonds and is currently at 24%.Gokarn also met select market participants in a separate meeting, where the market players urged the central bank to conduct further bond purchases through open market operations (OMO).The RBI started its Rs 48,000 crore OMO last month stretched over four weeks and the last round is pending on Wednesday.The RBI cut the SLR to 24% from 25% effective December 18.Deposit growth has been 6.8% so far this fiscal compared with 9.1% in the same period year ago, according to the RBI's latest data.Inflation, credit growthIt is a tightrope walk for the central bank in its endeavour to contain inflation and maintain credit growth."This year (2010-11), we can achieve RBI's 20% projection and we told this to them. But if we have to maintain the momentum next year, then we need resources. So the RBI has to be careful to not hike rates sharply," said another banker.Bank credit rose 12.2% so far in 2010/11 compared with 6% a year ago, the RBI data showed.India's food inflation in the week to December 25 rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike.Bond yields and swaps have been surging since Thursday following the food inflation data and recent comments by the central bank governor fuelled rate hike worries.The most-traded 8.08%, 2022 bond yield ended at 8.19 percent, flat from previous close and up 9 basis points since Wednesday close.The benchmark five-year swap rate closed steady at 7.96% steady from the previous close, but up 26 basis points since Wednesday.A pause in the central bank's rate tightening cycle should be interpreted as a comma and not a full stop, Governor Duvvuri Subbarao said on Friday, sparking worries that further monetary policy tightening may be coming up. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
