Banks are urging the RBI not to hike the CRR any higher

Indian lenders have asked the Reserve Bank of India (RBI) not to raise the Cash Reserve Ratio (CRR) threshold further in the forthcoming monetary policy to ensure unhindered credit growth amid a liquidity glut evident since early May.

The Indian Banking Association (IBA) made the demands on behalf of the lenders to the central bank last week after excess liquidity fell to nearly 3.5 lakh crore, about half the amount held by the RBI during the pandemic.

        "The cash surplus used to be about 6,000,000,000 rupees, now it's almost half that," said one banker. The recent increase in the CRR to 4.5% sucked around 90,000 crore out of the system.

"System in Neutral Liquidity Mode"

Cash reserve ratio is the proportion of deposits that banks hold with RBI. "Given the expectation of a recovery in credit growth from the second quarter, we have asked the regulator not to increase the CRR given the decline in excess liquidity over the past two months," the banker added.

Market participants surveyed ahead of the expected policy announcement later this week did not rule out a further rise in the CRR as the central bank tries to rein in inflation.

"According to the regulator's calculations, the neutral liquidity condition is +/-2% of net demand and temporary liabilities, which should keep normal liquidity levels at around 3 lakh crore," said the person quoted above. "If the CRR is increased here, the system will run into a liquidity deficit. We are approaching peak lending season and such a move will create a bottleneck."

The Banking Association of India did not respond to any emailed inquiry.

The RBI held an off-cycle Monetary Policy Committee meeting on May 4 to announce a 40 basis point hike in the repo rate to 4.4% and a 50 basis point hike in the CRR to 4.5%.

One basis point equals 0.01%.

In the Monetary Policy Committee's view, the deterioration in the inflation outlook warranted timely action to avoid inflationary pressures. According to analysts, the increase in the CRR has led to a margin compression of almost 3 basis points for the banking system.

The experts pointed out that the desire not to raise the CRR threshold was partly justified by the fact that the supervisory authority does not pay interest on banks' CRR balances. As of May 27, 2022, Indian banks parked 8.17 lakh crore as CRR with RBI. "CRR balances generate negative returns for banks because they have to pay depositors with those funds, so they don't want the regulator to keep raising the CRR," said a rating agency analyst, citing an anonymous comment.


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