MUMBAI: liquidity in the banking system has improved, bankers say, and this may help interest rates to soften even if the central bank continues with its hawkish stance on policy rates.
"There is enough liquidity and capability of raising funds through other sources for banks," federal bank treasury head Ashutosh Khajuria said. Banks are sitting on excess funds of about Rs 4 lakh crore by way of holding excess government bonds, he said. "Many banks are trying to move out of government bonds and get into alternative sources. Going by this trend, banks may continue to look at retail products even after the festive season is over."
On Friday, banks parked Rs 20,230 crore with the Reserve Bank of India's reverse repo window, the highest since May 2011. A day earlier, borrowing through the repo window was Rs 6,850 crore.
Bank borrowing from the RBI fell to Rs 2,120 crore on September 6, the lowest in this calendar year, from Rs 71,470 crore on August 14.
Banks can borrow funds from the RBI's repo window at the repo rate of 8% by pledging government securities, and they can park funds with the RBI at the reverse repo rate, which is 1% lower than the repo rate. Liquidity tends to be surplus when the revere repo rate becomes the operational rate.
Lenders on Friday voted in favour of another cut in the cash reserve ratio (CRR), or the proportion of deposits they must keep with the RBI, in the half-yearly monetary policy review due on October 30. Last month, the central bank had reduced CRR by 25 basis points to 4.50%, releasing Rs 17,000 crore into the banking system.
Experts, however, are divided on the need for another cut in CRR. "CRR is a tool for managing liquidity and not an interest signalling tool. If the RBI cuts the CRR further, it will be equivalent to a repo rate cut of almost 100 basis points, as the operational policy will shift towards the revere repo rate, that is 7%," said the head of treasury at a private bank. "This may thwart the benefits from the RBI's anti-inflationary monetary actions," he said.
Some economists, however, make a case for a CRR cut, citing lower growth in money supply and slowdown in investment-driven growth due to higher lending rate as reasons.
"We continue to expect the RBI to cut CRR by 50 basis points to pull down lending rates to support growth," said Indranil Sen Gupta, chief India economist at DSP Merrill Lynch.
"After all, growth in money supply (M3 or cash and currencies) at 14% levels is running way below 16%-17% levels warranted by 7.5% growth. Not surprisingly, India is the only BRIC nation where lending rates are at their 2008 peaks. Unless lending rates come off, FY13 growth will find it very difficult to do our 5.6% growth forecast, let alone 6.5%."
Rates on money market instruments have also remained soft due to lack of credit pick-up and surplus funds with banks. Rates on three-month commercial paper fell to 8.65% on October 4, the lowest this year, from 9.75%-10% in June.
Ohh thats good to know that liquidity in the banking system has improved, bankers say, and this may help interest rates to soften even if the central bank continues with its hawkish stance on policy rates. Many people are going to do home appliances shopping this Diwali.
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