RBI repo rate,CRR cut inevitable for growth to pick up,say NIBM experts

Despite the slowdown,experts at the National Institute of Bank Management,an advisor to the banking industry,say the solvency position of banks is quite comfortable,but point out that a cut in the repo rate and the cash reserve ratio is inevitable for growth to pick up.

Written by Ishfaq Naseem | Published:June 8, 2012 1:07 am

Despite the slowdown,experts at the National Institute of Bank Management (NIBM),an advisor to the banking industry,say the solvency position of banks is “quite comfortable”,but point out that a cut in the repo rate and the cash reserve ratio (CRR) is “inevitable” for growth to pick up.

Dr Arindam Bandyopadhyay,Associate Professor,Finance,NIBM,said there is no need to press the panic button as capital adequacy position of “systematically important banks is well above comfort level of RBI.”

“The solvency position of major scheduled commercial banks in India has substantially improved since the implementation of Basel II capital adequacy norms set by RBI in 2008-09,” Arindam said. He,however,said a cut in repo rate or CRR is “inevitable” to push up Gross Domestic Product (GDP) growth. “The CRR and repo rate cut is inevitable and the cut is likely to be 0.5 percent to increase liquidity in the system.” Experts,however,point out that the impact of the rate cut will not be immediate and “for any broad recovery” in the growth in the country the global economic situation should also look up.

“The impact of rate cuts on the economy would not be immediate. Generally it has been seen that the impact is felt not before three quarters,” said Bandyopadhyay. He,however,said that in case the deposit mobilisation is good and the credit offtake by industry is satisfactory,“economic growth momentum can be maintained well.”

Dr Sanjay Basu,another expert in Finance at NIBM said global factors will play a “major role in improvement of domestic economy.” “The confidence in the Euro market should improve for the domestic economy to look up,” he said.

Bandyopadhyay added that the recent slowdown in GDP growth witnessed over the few quarters is due to “deterioration in the global economic environment due to the crisis in Europe,and increased risk aversion around the world.” “A key factor for deceleration in recent GDP growth rate is because of fall in manufacturing sector growth. Further,exports growth also dropped to 15.3 per cent in 2012 as against 22.7 per cent in 2011 due to weak global environment,” he said.

“The moderation in inflation is creating space for monetary policy to address the growth concern. However,the fall in rupee may increase input cost and pose a risk to the inflation trajectory,” said Bandyopadhyay.

He said banks while lending will also take into account credit risk position in the corporate sector. “There is a downgrade in risk instruments issued by the companies,” he added.

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