CRR cut not to generate liquidity

NEW DELHI, APRIL 21: The Reserve Bank of India's (RBI) decision to cut cash reserve ratio (CRR) by 50 basis points is unlikely to generat...

NEW DELHI, APRIL 21: The Reserve Bank of India’s (RBI) decision to cut cash reserve ratio (CRR) by 50 basis points is unlikely to generate liquidity in the system due to the large government borrowings in the current fiscal, ICICI securities (I-Sec) has said.

"CRR cut is a mild positive but the large government borrowings programme is likely to suck out the incremental liquidity," I-Sec said in its monetary and credit policy analysis.

RBI yesterday reduced CRR by 50 basis to 10 per cent from 8th May, which is likely to release Rs 3,250 crore into the system.

I-Sec said with the borrowing programme expected to continue at brisk pace, a marginal tightening of yields is likely over the next few months.

With the current political scenario being turbulent the forex markets could again become volatile and RBI is expected to continue interest rate targeting to ensure orderly markets through infusion of liquidity at appropriate times, I-Sec said

On the RBI decision to permit banks to fix different primelending rates, it said the measure would help banks in managing their asset-liability management better.

With these steps, the lending rates has been effectively deregulated except for priority sectors, it added. I-Sec further said RBI decision to allow money market mutual funds (MMMFs) to offer cheque book facility would result in a shift from savings deposits towards units of these funds.

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It said interest on savings deposits is 4.5 per cent while for MMMFs return would be around six per cent based on a floor of repo rate. The proposal of RBI to allow Unit Trust of India (UTI), Life Insurance Corporation of India (LIC) and other non-bank participants to borrow through repos is the first step towards making the call money market purely inter-bank, I-Sec said.

Currently non-bank institution are also allowed to participate in the call money markets. "These entities may prefer to buy securities and repo them for cash requirements rather than deploy near-term in the call money market," it added.

"If alarge portion of this money becomes unavailable, there would be upward pressure on overnight call money rates," it said. The latest available data indicate that non-bank institution lent over Rs 5,000 crore in January in the call money market.