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RBI Stumps All With Unexpected 75 Bps CRR Cut

Business World Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The Reserve Bank of India (RBI) pleasantly stumped bankers on Friday with an unexpected 75 basis points (bps) cut in the cash reserve ratio (CRR) to 4.75 per cent. The move, effective 10 March, will infuse Rs 48,000 crore in liquidity. Chanda Kochhar, Managing Director & CEO, ICICI Bank said the 75 bps CRR cut is a proactive step by RBI to inject permanent liquidity into the system. "This is expected to bring down the high level of overnight borrowings by banks from RBI. This would also ensure continued smooth flow of credit in the corporate and retail sector". The immediate trigger for CRR cut, ahead of a planned monetary review on March 15, is that liquidity may tighten further on advance tax payments bang in middle of the Ides of March. In recent times, liquidity has come under strain because of the central bank's dollar sales which sucks out rupees from the system. Systemic liquidity had been short by atleast Rs 1,80,000 crore and banks had been borrowing to make good the shortfall from the central bank. Through 50 bps CRR cut in its third quarter monetary policy review plus on-going open market operations (buying gilts held by banks and infusing liquidity) since since November 2011, RBI had already infused liquidity to the tune of Rs 1,50,000 crore into the system. "Even after the CRR cut, liquidity will remain in a deficit. The CRR cut comes less than a week before the RBI's scheduled meeting on 15 March. The central bank could not wait until the policy day because the reporting fortnight (and hence banks' reserve maintenance) starts from the fortnight beginning 10 March", says Sonal Varma, economist at Nomura (India). She added "the timing of the rate cut is not as much a surprise as the quantum". The larger-than -expected CRR cut (Consensus and Nomura were expecting a 50 bps cut in policy) suggests that the RBI has taken care of near-term liquidity concerns and may not need to resort to further open market operations. Post the CRR cut, liquidity deficit should ease substantially in April and May to around the RBI's stated comfort zone of a per cent of net demand and time liabilities or at about Rs 60,000 crore. "We now expect status quo on both the CRR and repo rate at the 15 March policy meeting. In our view, today's CRR cut does not automatically imply a policy rate cut. This is because oil prices are already high and the budget is one day after the RBI's policy on 16 March (where the RBI wants to see fiscal consolidation). Therefore, we assign only a 30 per cent probability to a repo rate cut on 15 March and our base case remains that repo rate cuts will start in April. We expect no further CRR cuts this year and expect 100 bps of repo rate cuts in 2012, starting in April", explains Varma.