Bankers have always known that cutting policy rates is not a remedy to the economy’s ills. But this does not ever prevent them from asking for one.
They repeated their beaten demand— a 25 basis points repo rate cut and a reduction in their cash reserve ratio —in the pre-policy meeting with the Reserve Bank of India, a report in The Economic Times says.
Repo rate is the rate at which the central bank lends to banks and cash reserve ratio is the proportion of deposits banks need to keep with the central bank.
Earlier too, banks had sought the same, if not steeper, reduction. But an adamant RBI – and rightly so — has held firm that it is the government which should act now, given that inflation is far from controlled.
And after the last policy review, prior to which the clamour for a rate action got louder due to the dismal factory output data, RBI Governor reiterated his resolve to fight inflation, even at the cost of growth.
Nothing much has happened to change the RBI’s stance since. On the contrary, there are indications that things are going to get more difficult towards the year-end due to scanty monsoon.
But bankers are hoping against hope that the RBI will listen to them and give a rate cut boost. Why are they, like industry captains, desperately seeking a rate cut?
The answer is margins. A rate cut will definitely help them preserve their margins.
A report in Business Standard says that the RBI chided banks for not cutting lending rates as much as they should have.
The central bank cut its policy rate by 50 basis points in April, but only select banks have reduced their lending rates, that too only by 10-25 basis points.
Some banks, like State Bank of India, have reduced interest rates on certain loans, but not the base rate.
Policy transmission will not be complete unless there is a fall in base rate, which is the benchmark rate in the system.
The BS report says the message from the central bank is clear: policy transmission is the key.
The central bank has time and again said that banks may have to sacrifice their margins if they have to support the long-term growth of the economy.
The responsibility of supporting an economy, during troubled times like these, is more on banks than any other industry. Because of this disadvantage, they have to behave more responsibly.
Take, for example, their demand for a reduction in cash reserve ratio. Can there be a more irrelevant demand at a time when liquidity deficit is not a major issue. CRR is a tool the RBI uses largely to address liquidity issues in the system. That there is no liquidity crunch now is evident from banks’ daily borrowing from the RBI.
On Monday, banks borrowed about Rs 39,600 crore from the central bank. This amount is much lower than the RBI’s comfort zone of Rs 50,000 crore.
So, a demand for a CRR cut holds no water as it would result in pumping more cash into the system.
The demand for a rate cut too looks dicey, for the RBI wants to wait till it sees action on the fiscal front.
Some brokerages, however, do not think the deficient monsoon is a cause for worry. “In our view, 3-4 percent contraction in foodgrain production will not have a major impact on prices due to record production of foodgrain in 2011-12 at 252 million tonnes (mt); higher allocation of around 14 mt by FCI for public distribution and open market sale will increase the surplus,” brokerage Emkay said.
As of now, margins can wait. The RBI will take its own call after seeing the price index and industrial production data that will precede the policy announcement on 31 July.