Cash reserve ratio cut under consideration: Subir Gokarn, RBI

KOLKATA: The Reserve Bank of India is considering a cut in cash reserve ratio, among other things, amid tight liquidity in the money market and rising demand for easing of monetary conditions to face economic slowdown, a senior central banker said.

“There is a lot of debate over CRR cut. It’s under consideration,” the Reserve Bank of India deputy governor Subir Gokarn told members of the Bankers’ Club at the Bengal Chamber of Commerce and Industry. “Excessive borrowing through LAF is beyond our comfort level. We do think excessive withdrawal from LAF may be stressful for banks even if it may not strain the system as a whole.”

Demand for monetary action by RBI is gaining momentum despite the central bank’s stated stance of anti-inflation. With economic growth slowing and the threat of contagion from Europe strengthening, there is a belief that there could be some monetary action. Furthermore, the liquidity in the system is also under stress with banks borrowing substantially more from the Liquidity Adjustment Facility, or LAF, of RBI than what it desires.

Banks have been drawing an average of Rs 1 lakh crore daily from RBI since November 24 using the LAF window at 8.5% repo rate.

The regulator’s comfort level is 1% of net demand and time liabilities, which is about Rs 60,000 crore. The above average borrowing has fuelled speculation that RBI may cut CRR by 50 basis points from 6% to inject liquidity into the system. RBI will announce its mid-quarter policy review on December 16.

But Gokarn maintained that CRR is a monetary tool - intended to exhibit its stance on direction of interest rate, rather than one to manage the liquidity in the system. “Whether using an instrument that is part of monetary toolkit to address liquidity issue is certainly a debate which we have to engage in,” Gokarn said.

However, a section of the market feels that a relaxation in the reserve ratio may not be used as inflation is still quite high and there are no signs of moderation, although food prices have started showing signs of a decline after 38 months. Gokarn said RBI will continue to do more open market operations to inject liquidity and the third one is lined up on Thursday to release .`10,000 crore in the system.