Will banks delay lending rates cut post RBI's CRR move?

Post the Reserve Bank of India's move to raise the cash reserve ratio (CRR) of banks to 100% of all net demand and time liabilities (NDTL), banks can delay lending rates cut, a report said.

The banks are flushed with liquid cash post demonetisation. In order to control this surge created in banks, the Reserve Bank of India on Saturday called for 'surgical strike' move.

As per the RBI, the higher CRR is applicable  on incremental deposits raised between September 16 and November 11, 2016. That would mean deposits of approximately Rs 3 trillion that accrued to banks during this period will be impounded by the RBI. 

According to a Crisil report, there will be an impact on interest rate transmission. "Banks could delay cutting their lending rates given that they have promised at least 3-4% interest rate to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR".

The immediate impact will cause  liquidity to tighten and send bond yields on a northward blip as in the  the coming days in the aftermath of demonetisation, will ease the pressure on yields, the report said.

Moroever, it will be the key factor driving the repo rate decision during the bi-monthly monetary policy on December 7. 

Dharmakirti Joshi, Chief Economist, Crisil, in the report titled 'Wielding the blunt drainer', said, "Since the last monetary policy review in October, the downside risks to growth have risen and that to inflation have subsided. The fall in the value of rupee could exert some upward pressure on the imported component of inflation. We believe the odds are in favour of a 25 bps repo rate cut to 6%".

Having similar views on rates cut, SBI Research in its report said, "We expect the RBI now to cut rates aggressively in December upto 50 basis points".

Because of this move, the total CRR requirement of the banks would be around Rs 8 lakh crore. Also, banks will have to resort to selling of Government Securities under repo operations in order to manage their liquidity position, the SBI report said.

"In the next two days, a total of Rs 1.72 lakh crore will be coming back into the system. Moreover, RBI today announced variable rate repo auction of whopping Rs 3 lakh crore. Thus, the system liquidity will remain comfortable", SBI research paper said.