CRR Cut Calls Get Shriller as RBI Fails to Prop Up Liquidity

LIQUIDITY THREE TIMES SHORT OF COMFORT LEVEL

Calls for a cut in the cash reserve ratio (CRR) to boost liquidity are gaining momentum as cash payments during state elections, intervention to stabilise the rupee, and slowing loan repayments by companies drain money out of banks. 

The central bank, which succeeded in keeping the government's cost of borrowing in check with the so-called open market operations (OMO), hasn't succeeded in easing liquidity pressure on the banking system. In OMOs, the RBI buys bonds, increasing cash in the system. Banks' borrowing from the Reserve Bank of India's repo window, an indicator of liquidity, rose to . 1.70 lakh crore on Tuesday, compared with August 2010 when banks were depositing excess funds with it. This deficit is more than three times the approximate . 55,000 crore the RBI has said it is comfortable with. "We expect a CRR cut of another 50 basis points that would release about . 27,000 crore into the system," said Pawan Bajaj, head of treasury at Bank of India. 
With price pressures still dominating the RBI's policy decisions and no signs of an interest rate cut, a CRR cut may be the policy option after . 60,000 crore was sucked out of the system in four months to stop the rupee's slide. CRR is a proportion of deposits that banks have to keep with the RBI. The central bank sold $12.5 billion in the four months ended December to stop the rupee's precipitous slide. Despite slowing loan growth and the RBI taking steps to ensure sufficient liquidity, banks are borrowing record amounts of money from the central bank. 
Bankers say it may be due to their aversion to high-cost bulk deposits, higher demand for currency due to state elections and action in the currency market. The RBI last cut CRR on January 24 by 50 basis points. 
"To that extent of intervening in the forex market, we have sucked some liquidity," RBI Deputy Governor Subir Gokarn told ET in an interview after the cut. "We tried to offset that, but clearly the pressure is still there." Many Banks Not Mobilising High-cost Funds 
With market rates higher than what RBI offers, banks that could borrow using their excess government bond holdings are benefitting. Banks are mandated to hold 24% of deposits in government bonds, above which they can pledge with the central bank to borrow. 
"Many banks have decided not to mobilise high-cost deposits and have therefore increased their reliance on borrowing from the RBI through the repo window, which gives an impression that liquidity is tight," said MV Tanksale, CMD of Central Bank of India. "But most banks are sitting on excess SLR." Some banks may also be borrowing to benefit from the arbitrage in the market where interest rates are about 1 percentage point higher. Inter-bank lending is at around 9%. Further, the government's sustained bond issuance is straining the liquidity. 
The government will borrow at least 25% more than what it forecast last February as revenue growth lags estimates and plans to raise . 40,000 crore from disinvestment look impossible. "Government borrowing has increased substantially in the past few months but the money is not coming back into the system," said BA Prabhakar, CMD of Andhra Bank. "Secondly, money in circulation has gone up which is historically the case during election period. This has lead to shortage in the system."