oppn parties CRR, RBI and Demonetization

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  • Sabarimala case referred to a larger bench as the court says several contentious issues need deeper examination
  • 16 killed as the vehicle they were traveling in plunged into a deep gorge near Jammu
  • Vodafone CEO seeks government relief, saying India operations on the verge of collapse
  • Three teenagers killed in a major accident in Kolkata's New Town area when their Honda City rammed into a road divider and a Metro pillar. The car was mangled
  • Vishwa Hindu Parishad not to publicly 'celebrate' Babri Masjid demolition day this year, all events will be closed door
  • JNU students march against the steep hike in fees, keep HRD minister Ramesh Pokhriyal stuck at the venue of the convocation
  • USFDA says Cytotron, an anti-cancer kit developed by Bengaluru based Rajah Vijay Kumar, is a "breakthrough device" for treating liver, pancreatic and breast cancers
  • Car sales show a minuscule uptrend after declining continuously for 11 months
  • Industrial output contracts by 4.3% in September, the worst decline in 8 years
  • Centre defends abrogation of Article 370 in the Supreme Court, says the power under it was used by the President six times previously
  • Legendary singer Lata Mangeshkar admitted to hospital with lung infection, put on ventilator
  • Shiv Sena MP Arvind Sawant quits as Union Minister
  • National Security Advisor Ajit Doval met the leaders of both Hindus and Muslims in Delhi on Sunday to ensure peace and harmony is maintained after the Ayodhya verdict
Supreme Court dismisses plea for review in Rafale case, says no need for roving inquiry, maintains clean chit to government
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CRR, RBI and Demonetization

By Ashwini Agarwal

The RBI has instructed all banks to keep 100 percent of the cash deposits they have received since September 16 till November 11 in Cash Reserve Ratio (CRR) with it. Now CRR is a non-interest bearing deposit which the banks maintain with the apex bank. Banks, on the other hand, are paying 4 to 6 percent interest to savings bank depositors. Hence, banks will be losing out to that extent.

CRR is an instrument of setting liquidity in the financial market. The RBI uses it alternately to either flush out, or pump in, money in the banking system. Since banks can lend on the back of funds available with them, the RBI, by tweaking the CRR norms, decides how much they can lend. Normally, this figure remains between 4 to 7%. It is currently at 4%. But since there has been a spurt in bank deposits post demonetization and excess liquidity in the banking system can lead to inflationary pressures, the RBI has taken this surprisingly extreme step.

Two things need to be stated here. Since demonetization, limits have been set for people to withdraw their own money from their bank accounts. One can only withdraw a cumulative Rs 25000 from savings and Rs 50000 from current accounts in a week (and the week here means clear 7 days and not Saturday of the preceding week and Monday of the following). If withdrawal limits are in place, even if banks lend money to people, how are they going to use it? The only way it can be used is if loans are taken for white goods, automobiles or homes and the like, where cheque payments are accepted. So is the government trying to stifle that market? Common sense would permit vigorous lending by banks in these depressed times for business. That would improve business sentiment considerably.

Secondly, this is the right time for the banks to earn some money. Since they are flush with funds, they can lend in sectors that are less risky, for instance home and automobile or to borrowers with good ratings in business and industry. There are reports of property prices crashing. If people can get bargain deals for properties and banks lend them money, a lot of deals can now be struck. This will liquidate part of the huge unsold inventory in the real estate sector and will have immediate effect on all sectors related to it.

Hence, the RBI decision is baffling, to say the least. It could have raised the ratio to 6 or even 10 percent to flush out some cash, but a 100% CRR is regressive. Add to it the additional burden on banks of paying interest on savings bank deposits without getting any from the RBI and the trouble for banks is multiplied. Although the RBI has clarified that it is just a temporary measure, having worked long hours to implement demonetization – with employees facing stress and much more – bankers would not be happy with such a restrictive fiat from the apex bank.