State Bank of India is looking forward to the Reserve Bank of India (RBI) effecting a cut in CRR (cash reserve ratio) by one percentage point next week to ease liquidity as a monetary measure to combat the economic slowdown and spur growth.
Interacting with the media on the sidelines of Finance Minister Pranab Mukherjee's meeting with public sector bank (PSB) chiefs here on Tuesday, SBI Chairman Pratip Chaudhuri said: “We expect the RBI to cut CRR by one percentage point ...We have made a request, but it is for the RBI to take a call. We would be happy if there is one percentage point CRR cut. It will recharge lot of investors' sentiments, the economy and also stock markets.''
In the wake of sliding investor confidence and a slump in industrial growth, Mr. Chaudhuri argued that easing the CRR — a portion of cash deposits that banks are required to park with the apex bank — would be a more effective tool in kick-starting growth as compared to a cut in the key policy rate. “CRR cut is definitely more useful. CRR cut is any day six times more effective than a rate cut,” he said.
The SBI chief pointed out that a CRR cut would not only ease the liquidity situation, it would also improve the profitability of banks and, thereby, reduce the need for recapitalisation. “…if there is one percentage point CRR cut, it will release Rs.60,000 crore in the system which will help banks earn Rs.5,000 crore of additional profit,” he said.
At present, the liquidity situation, Mr. Chaudhuri said, “is just about average” and “not comfortable”. This is clear from the fact that banks are borrowing three-month money at 9.5 per cent. Even as the RBI, during its mid-quarter monetary policy review on June 18, is expected to announce measures aimed at reverting economic growth to a higher trajectory from its nine-year low of 6.5 per cent in 2011-12, much would depend on the overall trend in headline and food inflation. The WPI (wholesale price index) based inflation data for May is to be announced on June 14.