A cut in the cash reserve ratio (CRR) seems improbable in the upcoming monetary policy review meet of the Reserve Bank of India (RBI) on January 24 as the Indian central bank’s deputy governor has indicated that lowering the amount of funds that the banks have to keep with RBI will be contradictory to the anti-inflationary stance that RBI has taken. Select bankers, who participated in the customary pre-policy meeting held by the RBI, had sought a cut in CRR so that liquidity pressures that are likely to surface in the near future are taken care of.
Though the amount kept with the bank under CRR does not characteristically earn the banks any interest, however the bankers have requested RBI to pay interest on it. Bankers are of the view that liquidity still remains under stress and a cut in the CRR which is at 6% is justified as borrowings from the RBI's daily liquidity adjustment facility, or LAF, have been beyond the central bank's comfort zone of +/- 1% of the banking system's net demand and time liabilities (NDTL) for quite some time.
The bankers have also sought for concessions from the RBI in the second round of restructuring for loans given to textile and steel companies while the asset quality of banks have also been adversely affected amid the indications of slowing economic growth and thirteen interest rate hikes by the RBI since march 2010. Stress on the asset quality is one of the main concerns that banks are focusing on and are hoping that credit monitoring mechanism is strengthened substantially.
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