Will CRR cover way for lower interest rates
The RBI has acted swiftly in cutting the cash reserve ratio (cash that banks have to keep with the RBI) from 5.5 % to 4.75 % to prevent a crisis in banks. They had been borrowing heavily from the RBI facility, reflecting the heavy liquidity deficit they faced. Borrowing by banks had reached Rs 1,10,000 cr in the beginning of March against Rs 47,000 cr in October 2011. This caused the rates at which they were borrowing to shoot up. Rates often go through the roof in March because of the advance tax payment that corporates must make. This year Rs 60,000 cr is expected to be drained out of the banking system by March 15.
The RBI explained it decided to cut the CRR as it was not comfortable with the liquidity deficit faced by banks. This would release Rs 48,000 cr, which for each bank would mean an amount ranging from Rs 2,000 cr to Rs 7,500 cr, as in the case of the largest scheduled commercial bank, the SBI Home Loan. It would ensure smooth flow of credit to the productive sectors of the economy.
While borrowing for advance tax payments is a one-off situation, the continuing problem faced by banks in recent months was the heavy borrowing by the government and the RBI’s intervention to save the rupee from depreciating too much against the dollar. The government’s gross borrowing in the second half of 2011-12 was up 22.3 % above budget estimates. Click to know more Mirza the untold story songs download
This is one of the major factors contributing to tight liquidity. The banks have been facing a decrease in deposit growth 15.7 % in January 2012 compared to 16.9 % year-on-year. Credit growth also slowed and this was reflected in the decline in incremental credit growth from 12.2 % to 9.4 % to services, personal loans and housing loans. Home loan borrowers will have to wait a while before interest rates really come down as that will happen only when liquidity stabilises, according to some bankers. If the government could only curb the growth of its non-productive expenditure, there would be less liquidity deficit in banks.
The banks will not be in a hurry to pass on the fruits of liquidity immediately. Interest rates still remain among the highest in the world. The expectation is that the RBI will cut the repo rate (at which banks borrow from the RBI) by at least half a % in its March 15 mid-quarter policy review. This will, hopefully, help those who have taken home loans.
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