Mumbai, July 27: A cut in the cash reserve ratio (CRR) could serve as a mood elevator for the markets, according to the State Bank of India Chairman, Mr Pratip Chaudhuri. CRR, currently at 4.75 per cent, is the slice of deposits that banks have to maintain with the Reserve Bank of India (RBI). “Perhaps there should be a 50 basis points CRR cut (to 4.25 per cent). I don’t know what kind of liquidity signals are being looked at.
“I do not agree with this that the total borrowing under the LAF (liquidity adjustment facility) is a ‘measure of the street’. The ‘measure of the street’ is at what price banks are issuing certificates of deposits (CDs),” said Mr Chaudhuri at a press meet to announce the conclusion of the bank’s $1.25-billion five-year overseas bond offering. LAF is a facility extended by the RBI to banks to avail themselves of liquidity in case they face deficit or park funds with the RBI in case they have surplus funds on an overnight basis against the collateral of government securities.
Mr Chaudhuri said that if banks are continuing to issue CDs at 9 per cent and 9.2 per cent, it obviously indicates that the liquidity situation is not comfortable.
‘Strong case for rate cut’
“Last time they (the RBI) skipped CRR cut. So, there is a strong case for it now. Globally, the monetary authorities have taken upon themselves the task of rejuvenating the economy. One thing that they can contribute is by moderating the interest rates,” reasoned the SBI chief.
The interest rate differential between Indian and overseas markets opens up carry trade. “Rupee is a good currency for deposits but not-so-good currency for bonds. We think there is case for bringing down the CRR and that will have a cooling effect on interest rates, especially for customers,” said Mr Chaudhuri.
In case of a repo rate cut, the benefits (for banks) are little. If there is no benefit, then banks cannot pass on any interest rate cut, he explained.
Disadvantage India
“Interest rate acts as a signal. It is a necessary but not a sufficient condition (for growth). It is a mood elevator. If interest rate comes down, it will trigger enthusiasm (among various participants in the economy). To some extent, most markets are a function of sentiments. Market sentiment will turn positive if there is a reduction in interest rates,” said Mr Chaudhuri.
Pointing out that Indian companies were at a disadvantage vis-à-vis their foreign competitors, the SBI chief said if the promoter of a power plant buys capital equipment from an Indian manufacturer, then he has to take rupee loan, which will come at 10-11 per cent. If the promoter were to go for foreign gear, say, Chinese equipment, which is very common, the interest cost is 4 per cent.
Low-cost Deposits up
According to Mr Chaudhuri, SBI’s retail deposit growth has been quiet good in the first four months of the current financial year. Low-cost deposits in current accounts and savings bank accounts increased by about Rs 30,000 crore in those first four months. However, loan growth has been muted.
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