Incremental CRR Hike: A Normaliser
Views from Mr. Rana Kapoor, MD & CEO, YES BANK and Chairman, Yes Institute
November 29, 2016: RBI’s move over the weekend to increase CRR to 100% on incremental deposits raised between September 16, 2016 and November 11, 2016 is not surprising.
Post the announcement of demonetization of high value notes, the banking system has received over INR 5 lakh cr as deposits. This trend of a significant surge in deposits is expected to continue over the next few weeks. The tapering of deposit base will commence once most of the currency in circulation in high value notes finds its way into the banking system along with easing of restriction on withdrawals.
This unprecedented situation had started to create a never-seen-before surge in systemic liquidity because of which the overnight money market rates had fallen nearly 25 bps below the policy repo rate. With the expectation of further pickup in deposit mobilization by banks, the overnight money market rates could have deviated further from the policy repo rate, fanning unwarranted exuberance and volatility.
While the RBI has been mopping up excess liquidity via term reverse repo, the window was expected to hit its overall capacity of approximately INR 7.6 lakh cr soon.
ü The CRR increase will mop up INR 3.1 lakh cr from the banking system and increase RBI’s wherewithal to absorb liquidity by a cumulative of over INR 10.5 lakh cr.
In my opinion, the current move should not be a concern as:
ü The CRR hike is an ad hoc step and should be viewed as a temporary response that will start reversing once the deposit mobilization by banks reaches a state of steady equilibrium.
ü Despite the CRR hike, the systemic liquidity would still be in a comfortable surplus of over INR 1.5 lakh cr.
ü This will boost RBI’s policy stance of keeping the overnight money market rates close to the policy repo rate.
Going forward, I expect the liquidity fine tuning exercise to be complemented by a reduction in the repo rate by 25 bps to 6.00% in the upcoming monetary policy review in December. With inflation firmly under control, this will drive cost of liquidity lower and help in supporting growth momentum.