The Indian Banks Association (IBA) has requested the Reserve Bank of India (RBI) on behalf of the banks 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.
“Earlier, surplus liquidity was hovering around Rs 6 lakh crore, now it’s almost half of that,” said a banker. The last increase in the CRR to 4.5% sucked about Rs 90,000 crore out of the system.. “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.
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.
Cash reserve ratio is the proportion of deposits banks keep with the RBI. The RBI held an off-cycle monetary policy committee meeting on 4th May, 2022 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%.
However, 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 27th May, 2022, Indian banks have parked Rs 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.