oppn parties CRR, RBI and Demonetization

News Snippets

  • Flipkart assures employees that there will be no job or salary cuts due to the COVID-19 pandemic
  • Although it was obvious, but the government still clarifies that there is no need to switch off appliances and only lights need to be switched off on April 5 at 9pm after confusion in the minds of some people
  • PM Modi and President Trump decide "to deploy full strength of (Indo-US) partnership" to fight against COVID-19
  • 17 states have reported 1023 cases of coronavirus linked to the Tablighi Jamaat, which translates to 30% of all positive cases in India
  • The government says people should not use alcohol-based hand sanitizers before lighting diyas or candles on April 5
  • The railways say there is no certainty yet when services will resume after the lockdown and a final decision will be taken in the next few days
  • As coronavirus cases multiply in Assam, six north-east states seal their borders with the state
  • Power System Operation Corporation Ltd. (POCOSO) putting all systems and protocols in place at war-footing to ensure there is no grid failure due to reduction in demand on April 5 at 9 pm
  • Power ministry scotches rumours that the power grid might fail due to the 9-minute blackout called by PM Modi on Sunday, April 5
  • Centre asks people to wear home-made masks if it is absolutely essential for them to step out of homes
  • Centre asks states to allow licensed street vendors to sell essential items
  • 8000 samples were tested across India on April 2, but the government said that testing will be need-based and will not be used as a confidence-boosting measure
  • Air India operating special flights to fly passengers stuck in India since the lockdown
  • For the first time in history, Darjeeling loses first flush tea due to suspension of garden work for Covid-19 outbreak
  • Supreme Court asks journalists to be responsible and publish only the official version of news after it was brought to its notice that migrant exodus started after the 'fake' news that the lockdown will be extended to three months
Total count stands ar 3082 as India records 16 Covid-19 deaths, the highest in a single day
oppn parties
CRR, RBI and Demonetization

By Ashwini Agarwal
First publised on 2016-11-27 13:35:47

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.