The Reserve Bank of India's decision to impose an incremental cash reserve ratio (CRR) of 100% on banks for all deposits made between September 16 and November 11 is set to reduce the pace at which yields on government securities are declining, CARE Ratings said on Monday.
The Reserve Bank of India’s decision to impose an incremental cash reserve ratio (CRR) of 100% on banks for all deposits made between September 16 and November 11 is set to reduce the pace at which yields on government securities are declining, CARE Ratings said on Monday.
“This move has been taken ostensibly to mop up excess liquidity in the system and involves the period prior to demonetisation,” CARE said in its report. “While these deposits would have been put to use, an equivalent amount has to be handed over to the RBI as CRR which will come primarily from the deposits in the subsequent period on account of the exchange of currency.”
The RBI on Saturday announced that all banks will have to keep 100% of all deposits received between September 16 and November 11 – around Rs 3.24 lakh crore – as CRR with the central bank, with an intention to mop up excess liquidity in the system. CRR – currently 4% – is that portion of a bank’s deposits that it is mandated to keep with the RBI.
As a result of the banks’ increased deposit bases post demonetisation of higher-denomination currency notes, they were pushed to invest all the money in government securities, which are considered to be the most secure of all secondary market instruments.
However, experts say that if banks are now required to keep these incremental deposits with the RBI as CRR, there would be wide-scale selling of government bonds, which would result in yields on these bonds rising or, at the very least, falling far slower than they have been since the beginning of the current fiscal.
So far in FY17, the yield on the 10-year benchmark bond has fallen by over 110 basis points and closed at 6.33% on Monday. On Thursday, the yield closed at 6.19%, its lowest closing level since April 2009.
CARE also said had the Rs 3.24 lakh crore remained in the hands of banks, they would have ended up making over Rs 25,000 crore on these funds by a combination of investing in government bonds and lending. “This may be assumed to be the opportunity cost of these funds for a full year,” the rating agency said.
The RBI has said the CRR move is a temporary one and will be reviewed on December 9. “The credit policy in December would definitely review these measures in light of other developments that take place in the system on account of the currency conversion scheme. Supply of funds for credit will not be impacted in the interim period since demand is low and there is still adequate supply coming from fresh deposits flowing in,” CARE said.