CRR HURDLE

Reserve Bank of India, has recently come out with a notification that the entire deposits collected by Banks between the period September 16 and November 11 will be treated as reserve requirement, and that an incremental Cash Reserve Ratio (CRR) of 100% would be required to be maintained by banks, on deposits collected during the period mentioned herein.  The normal CRR as of now is only 4% of Deposits on which banks do not earn any interest.

Sensing a liquidity shortage RBI conducted an unprecendented level of liquidity infusion to the extent of Rs. 3.3 lakh crore, in which banks bid for as much as Rs. 4.5 lakh crore.  The Central bank hence informed that it would go for a liquidity infusion auction of Rs. 1 lakh crore on Tuesday to assist banks in tiding over the liquidity crisis.

Liquidity Adjustment Facility (LAF) is used to aid banks in adjusting the day to day mismatches in liquidity. … Repo operations therefore inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI in this case is called the reverse repo rate.

Result:

  • Due to the recent announcement of RBI, banks are running on the reverse gear now.  That is to say, instead of parking the excess cash of Rs. 5 lac crore with RBI under the Reverse Repo window Banks are now rushing to borrower money from RBI.  Incidentally this has also resulted in shooting up of bond yields in the market.
  • RBI would be coming out with its monetary policy review next week, two days before it revisits the CRR hike.  Hence, even if RBI cuts its interest rates sharply, banks are niot likely to cut their lending rates, due to the above reasons.

Author: Admin Bankedge

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