Banks don't want liquidity to drop, urge RBI not to raise CRR further

Indian lenders have requested the Reserve Bank of India (RBI) not to further increase the cash reserve ratio (CRR) threshold in the upcoming monetary policy to ensure unhindered credit growth amid a visible reduction in surplus liquidity since early May, two people aware of the representations told ET.

Indian Banks Association (IBA) made the requests on behalf of the lenders to the central bank last week after excess liquidity dropped to nearly ₹3.5 lakh crore - about half the amount maintained by RBI through the pandemic.

"Earlier, surplus liquidity was hovering around ₹6 lakh crore, now it's almost half of that," said a banker. The last increase in the CRR to 4.5% sucked about ₹90,000 crore out of the system.


'System in Neutral Liquidity Mode'
Cash reserve ratio is the proportion of deposits banks keep with the RBI. "With expectations that credit growth will pick up from the second quarter, we have represented to the regulator not to increase CRR, given the reduction in surplus liquidity in the past couple of months," the banker added.

Market participants surveyed by ET ahead of the policy announcement scheduled later this week haven't ruled out a further increase in the CRR as the central bank seeks to restrain inflation.

Another banker told ET that the system was already in neutral liquidity mode.

"As per the regulator's calculations, neutral liquidity condition is +/- 2% of the net demand and time liabilities, which should keep normal liquidity levels around ₹3 lakh crore," the person cited above said. "If CRR is hiked hereon, it will put the system in a liquidity deficit. We are approaching the peak credit season, and such a move will create a bottleneck."

The Indian Banks Association did not respond to ET's mailed query.

The RBI held an off-cycle monetary policy committee meeting on May 4 to announce an increase in the repo rate by 40 basis points to 4.4% and a 50- basis point increase in CRR to 4.5%.

One basis point is 0.01%.

As per the monetary policy committee, the worsening outlook on inflation warranted timely action to forestall inflationary pressures. The increase in CRR as per analysts, led to a margin compression of nearly 3 bps for the banking system.

To be sure, experts pointed out that the request to not raise the CRR threshold is also driven in part by the consideration that the regulator does not pay any interest on the CRR balances maintained by banks. As of May 27, 2022, Indian banks have parked ₹8.17 lakh crore as CRR with the RBI. "CRR balances yield negative returns for the banks as they have to pay the depositors on those funds, hence they do not want the regulator to hike CRR any further," said an analyst with a rating firm, on the condition of anonymity.