RBI Guv Raghuram Rajan takes on SBI, says no correlation between CRR and cheaper loans

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Mumbai | Updated: April 8, 2015 12:03:59 PM

Reserve Bank of India (RBI) Governor Raghuram Rajan today dismissed the demand made by SBI for a reduction in cash reserve ratio...

Raghuram Rajan, Raghuram Rajan SBI, SBI lending rate, RBI CRR, RBI monetary policy, RBI monetary policy review, RBI rate cut, RBI monetary policy 2015, rbi monetary policy rates, Reserve Bank of India, Inflation, Economy, Business newsRBI Governor Raghuram Rajan during the first bi- monthly monetary policy statement 2015- 16 Press Conference at the RBI headquarters in Mumbai on Tuesday. (Express Photo by Ganesh Shirsekar)

Reserve Bank of India (RBI) Governor Raghuram Rajan today dismissed the demand made by SBI for a reduction in cash reserve ratio (CRR) prior to the policy, as “irrelevant”, saying there is no correlation between lower CRR and cheaper loans.

The RBI left the CRR unchanged in its monetary policy review today.

“I don’t understand why the market has got so enthused about a cut in the CRR. It is irrelevant at this point, as far as the lending rates go,” Rajan said while speaking at the post-policy concall with analysts.

He said effecting even a 1 percentage point cut in the CRR, which is the amount of deposits banks have to mandatorily park with the RBI without any interest, will help reduce the lending rates by only 0.07 to 0.08 percent. Moreover, such a cut will release over Rs 80,000 crore into the market permanently, the Governor said.

Later in the evening, State Bank of India (SBI) cut base lending rate by 0.15 percentage point to 9.85 per cent and hinted at lowering deposit rate aswell.

It can be noted that SBI chairman Arundhati Bhattacharya was at the forefront of pressing for a cut in the CRR ahead of the policy announcement, saying it can reduce cost of fund which in turn will help the bank pass on the benefits to the borrowers.

The country’s largest lender has been repeatedly lobbying for a CRR cut or even its abolition and there was a very strong exchange of words between the then bank chairman Pratip Chaudhuri and the then deputy governor KC Chakrabarty regarding the same.

Chaudhuri had even demanded the complete abolition of the CRR, saying this was dead money.

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The SBI chief’s comments ahead of the policy announcement had led many market participants to believe that such a cut was on its way.

The banks are yet to pass on the benefits received from two earlier rate cuts to the tune of 50 basis points by the RBI and Governor Rajan has been nudging lenders to pass it to the borrowers.

Meanwhile, Rajan also blasted a section of the market participants for expecting a shift to the reverse repo rate, at which RBI borrows from the banks, as the operational rate from the current repo, at which it lends to the system.

“This is the second issue I found puzzling. First was CRR, why people were so gung-ho about it? If I were to move to reverse repo today, that means the operational rate in the market would move down to 6.5 percent. You are talking of a 100 bps cut in the policy rate.”

“Smell the coffee, guys. We are not going to cut interest rate by 100 bps overnight. The policy rate today is the repo rate which is at 7.5 per cent.

If I want to bring that rate down, I will cut the policy rate. The suggestion of moving to the reverse repo and moving to liquidity surplus is just nuts,” Rajan said.

According to a theory, with abundant liquidity in the system, as is the case now, there is a case for the reverse repo to become the operative rate because for the repo to be the operative rate, the liquidity has to be in the deficit mode.

It can be noted that both reverse repo and repo used to be the RBI’s guiding factors for the policy moves till a few years ago, when the RBI shifted focus and started using the repo as the operative tool.

On the transmission side, Governor Rajan said inflation, the repo rate and the deposit rates are moving in sync, but the same is not getting passed to the lending rates by banks.

“Now the question is, how much time does it take the banks to feed into the lending rates? Two factors play in that happening sooner than later.

One is the fact that credit growth has been tepid. Banks are sitting on tremendous amounts of liquidity which they can be deployed today in more lending,” he said.

He, however, added optimistically that there is a chance for the rates to get cut now and drew differences between the current scenario and the last time when the rates were cut to drive his point.

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