Mumbai, November 29: The Reserve bank of India seems to be launching attacks of its own amidst the government’s war on black money. In a surprise move last week, India’s top bank decided to raise the cash reserve ratio (CRR) of banks by 100% of the net demand and time liabilities (NDTL).
The move was adopted mainly to keep in check the availability of liquid currency as banks seem to be flush with deposits post demonetisation. However, according to Rana Kapoor, MD & CEO of Yes Bank, the RBI’s incremental CRR hike, is merely a normaliser post demonetisation.
Expressing his views on the move, the CEO of the banking giant said, “RBI’s move over the weekend to increase CRR to 100% on incremental deposits raised between September 16, 2016, and November 11, 2016, is not surprising. Post the announcement of demonetization of high-value notes, the banking system has received over INR 5 lakh cr as deposits. This trend of a significant surge in deposits is expected to continue over the next few weeks. The tapering of deposit base will commence once most of the currency in circulation in high-value notes finds its way into the banking system along with easing of restriction on withdrawals.”
Kapoor further justified the increase in the cash reserve ratio by adding, “This unprecedented situation had started to create a never-seen-before surge in systemic liquidity because of which the overnight money market rates had fallen nearly 25 bps below the policy repo rate. With the expectation of further pickup in deposit mobilisation by banks, the overnight money market rates could have deviated further from the policy repo rate, fanning unwarranted exuberance and volatility.”
According to Kapoor the CRR increase will mop up INR 3.1 lakh cr from the banking system and increase RBI’s wherewithal to absorb liquidity by a cumulative of over INR 10.5 lakh cr. The banker was of the view that despite the CRR hike, the systemic liquidity would still be in a comfortable surplus of over INR 1.5 lakh crore. He justified that this will boost RBI’s policy stance of keeping the overnight money market rates close to the policy repo rate.
Kapoor also said, “Going forward, I expect the liquidity fine tuning exercise to be complemented by a reduction in the repo rate by 25 bps to 6.00% in the upcoming monetary policy review in December. With inflation firmly under control, this will drive cost of liquidity lower and help in supporting growth momentum. ”