RBI needs to manage liquidity more proactively: Nomura

The note came a day after the Chairman of the country’s largest lender State Bank of India,Pratip Chaudhuri,said he expects the RBI to cut the cash reserve ratio (CRR) by one per cent,and not the repo rate,in its forthcoming policy announcement on Monday.

“With the rate cycle now easing,there are fears that cuts in the repo rate will not translate into lower lending rates as liquidity is tight and is likely to remain so,” the Nomura note said.

Noting that mere rate cuts are ‘futile’ if liquidity conditions worsen,Nomura made a strong pitch for better liquidity management for making the policy transmission effective,which can be done through cuts in the CRR and OMOs (open market operations) or buyback of government bonds.

It also highlighted to the high credit-deposit ratio of 77 per cent in the banking system which is also reducing the banks’ ability to support loan demand.

Additionally,giving historical data which points out to transmission lagging RBI actions by a notch,it also said that the rate cuts will have to be higher for an effective

transmission.

“If the RBI is serious about supporting growth,then policy rates will have to be cut much more for the same level of policy transmission to occur,” it said.

Calls for rate cuts from RBI have grown after last month’s government data which pointed to growth declining to nine year low of 5.3 per cent for the March quarter and 6.5 per cent for

the fiscal year 2011-12.

This has been followed by a slew of grim news stories,including downward revisions in growth estimates by analysts and rating agency Standard and Poor’s warning to junk India which came two days ago.