oppn parties CRR, RBI and Demonetization

News Snippets

  • Crude prices fall sharply as Saudi Arabia assures normal production in a few weeks. Prices fall by 5.4% to $65.30 per barrel
  • Sensex tumbles 700 points over fears that rising crude prices will deal a body blow to the tottering Indian economy
  • As Rajeev Kumar fails to appear before the CBI despite several notices, the agency forms a special team to locate and apprehend him
  • S Jaishankar says Pakistan is not a normal neighbour and its behaviour is a "set of aberrations"
  • External Affairs Minister S Jaishankar says PoK in Indian territory and the country hopes to have physical jurisdiction over it one day
  • Barasat Sessions court near Kolkata rejects Rajeev Kumar anticipatory bail application citing lack of jurisdiction as the reason
  • PM Modi celebrates his birthday with Narmada aarti and later has lunch with his mother.
  • All 6 Bahujan Samaj Party MLAs merge with the Congress in Rajasthan
  • Bengal CM Mamata Banerjee to meet PM Modi on Wednesday, state issues on the agenda
  • Pakistan to open Kartarpur corridor on Nov 9
  • Rajeev Kumar, ex-police commissioner of Kolkata and wanted for questioning in the Sarada scam does not appear before the CBI despite the state administration requesting him to do so
  • Supreme Court asks the Centre to restore normalcy in J&K but keeping national interest in mind
  • As Trump accepts the invitation to attend a programme in Houston with PM Modi, India rushes to settle trade issues with US
  • After drone attack on Aramco's Suadi Arabia facility, oil prices jump 19% in intra-day trading causing worries for India
  • Imran Khan raises nuclear war bogey again, says if Pakistan loses a conventional war, it might fight till the end with its nuclear arsenal
Sunni Wakf Board and Nirvani Akhara write to the Supreme Court for a negotiated settlement to the Ayodhya dispute
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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.