oppn parties CRR, RBI and Demonetization

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  • Karnataka HC has ruled that a harassment complaint lodged by a wife after receiving a divorce notice from the husband loses its weight in the eye of the law and quashed the FIR filed by a women against her husband and in-laws
  • 35 people killed in renewed violence in Manipur, 30 of them militants
  • Manipur boils on the eve of Home minister Amit Shah's visit as militants strike, vandalize MLAs home and loot armouries
  • Kerala chief minister P Vijayan says Centre's decision to cut the borrowing limit of the state is 'sadistic' and shows its negative mentality towards the state's development
  • Rahul Gandhi recieves passport, set to travel to the US
  • Centre said that the march-to-Parliament by wrestlers was a 'deliberate provocation'
  • Prime Minister Modi inaugurates the new Parliament building, calls it 'cradle of empowerment'
  • Mamata Banerjee will most likely attend the opposition meet called by Nitish Kumar in Patna
  • With container prices, which were on fire, crashing by 40% YoY, importers and exporters in India heaved a sigh of relief as the burden of high freight costs will reduce
  • In an aim to push lenders to manage risks better after the US financial crisis, the RBI has reviewed bond value norms
  • 14 countries under the Indo-Pacific Economic Framework (IPEF), including India, entered into an agreement to boost supply chains and counter China
  • Malaysia Cup badminton- H S Prannoy wins the title beating Weng Hong Yang of China 21-19,13-21, 21-18
  • Yashasvi Jaiswal replaces Ruturaj gaikwad as stand-by opener for the WTC final
  • IPL final washed out due to rain, rescheduled for today, the reserve day
  • In a shameful incident, Delhi Police manhandled international wrestlers when they sought to march peacefully to the new Parliament building to highlight their greivances, detained some top wrestlers
Fifth IPL title for Chennai as Ravindra Jadeja hits 10 off last two balls to spoil the party for Gujarat Titans
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.