Bankers see CRR hike round the bend

NEW DELHI: Just when bankers were beginning to get comfortable with the term ‘rate cut’, an inevitable hike in the cash reserve ratio driven by liquidity concerns has caught them off guard.

Though some of the bankers have resigned to the fact that the only option left for RBI to handle inflows is a CRR hike, many feel RBI would maintain a stable monetary stance in its review later this month.

The review is scheduled five days after SEBI’s crucial board meet on October 25 that will witness new regulations to curb inflows on account of participatory notes. The bankers are of the view that credit demand will pick up as the busy season kicks in and only a stable interest regime will stimulate demand. While a 25 basis point increase will not have a huge impact for banks, it will send a wrong signal as far as interest rates are concerned, they say.

Considering that the rate cut cycle has just been put into action, going forward it would have to factor in a possible tightness in liquidity, in case of a hike in CRR. In a bid to boost slackening credit demand, banks are expected to cut rates during the festival season lasting till the end of the year to stoke credit offtake.

“In my opinion, the system needs a stable interest regime for now. If a hike in CRR is exercised as an option, it will send a wrong signal for interest rate. The markets are flush with liquidity and inflation is near-benign. I do not think that RBI will send a signal to the banks to increase interest rates. In the event of a CRR hike, banks will wait for an opportunity to increase rates again, though the impact itself may not be too significant. I expect a stable monetary policy,” said Punjab National Bank executive director K Raghuraman.

“I think the regulator will take into account the overall view. I anticipate a stable regime for now. It is only now that the credit demand is expected to pick up across manufacturing, agriculture, exports and other sectors. The government was waiting for external factors to stabilise. Industrialists and exporters had a wait-and-watch approach as far as capacity generation was concerned based on the pick up in demand,” said Oriental Bank of Commerce executive director Allen C A Pereira.

Rate cuts spurred by market leaders SBI and ICICI was slated to act as a cue to other lenders to take advantage of demand over the next 10 weeks by deploying credit at lower rates. Credit offtake has fallen to worrying levels of 23% this month, compared to the year-on-year growth of 31%.

“The current rate cycle is only spurred because of the festival season. It is not permanent in nature. If you notice, none of the banks have tinkered with their PLR,” Mr Pereira added.

But is a CRR hike the only way to absorb liquidity on account of inflows or will RBI go slow on intervention? “The pipeline of the flow is so strong that it will need to let the rupee appreciate. The government borrowing in the rest of the fiscal is in tandem with MSS issuance. It will act as a quasi-sterilisation measure," said HDFC Bank chief economist Abheek Barua. It is understood that sterilisation worth Rs 20,000 crore under MSS has been administered, after an increase in the limit up to Rs 2,00,000 crore for the current fiscal.