RBI must not choke liquidity; raise rates transparently: SBIhttps://indianexpress.com/article/news-archive/print/rbi-must-not-choke-liquidity-raise-rates-transparently-sbi/

RBI must not choke liquidity; raise rates transparently: SBI

n To arrest rupee plunge apex bank has limited banks’ access to cash

State Bank of India (SBI) chairman Pratip Chaudhuri has said the Reserve Bank of India (RBI) should have used transparent measures to raise interest rates to manage the rupee and should not have choked liquidity for banks.

“Today the repo rate is 7.25,but funds are not available and from (another) window money is available instead at 10.25 per cent. It doesn’t help anybody in covering or camouflaging the repo rate. If the repo rate has to be taken to 10.25 per cent,so be it,but do it in a transparent manner,” Chaudhuri said.

The sharp criticism by the chairman is highly unusual for the public sector dominated banking where the regulator’s action is rarely questioned.

Chaudhuri made the comments on a day when bank stocks were hammered. BSE bankex fell by 4.16 per cent with SBI stock losing 3.13 per cent as the RBI choked liquidity in the markets and effectively raised the repo and the cash reserve ratio (CRR) on Tuesday night. Repo is the rate at which banks borrow from the RBI and the latter is the percentage of deposits that banks have to park compulsorily with it.

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Chaudhuri acknowledged that RBI had compulsions for making the rupee costly through these steps. But,he added that this should not put pressure on liquidity since that in turn impacts the balance sheet of the banks. “To prevent the inflation from going out of hand,please increase the interest rate (but) don’t choke liquidity,” he said at a Banking Conclave organised by Ficci in Kolkata.

The chairman of SBI has reasons to be concerned as the RBI’s moves through this month to fight rupee depreciation will negatively impact the money the banks can set aside for loss provisioning. SBI’s first quarter results are expected next week. His comments imply that the RBI,under governor D Subbarao,has not considered these damages in its quest to make the rupee hold out against other currencies.

The RBI had on Tuesday limited the access of banks to borrow funds from it by reducing the liquidity adjustment facility for each bank from one per cent of total deposits to 0.5 per cent. To suck out excess liquidity from the system,the RBI also asked banks to maintain higher average CRR of 99 per cent of the requirement on daily basis as against earlier 70 per cent.

The measures could suck out Rs 4,000 crore to Rs 5,000 crore from the system.

Meanwhile,Chaudhuri also said that SBI will remain unaffected by the absence of bond market in the country.

“The bond market is dead. Neither the Centre nor state governments

are able to come up with

new issues. Banks which

rely on short-term funding may be hurt. Banks like us where 99 per cent of the funding is from retail sources will not be affected,” he said after a meeting of bankers with finance minister P Chidambaram.

But the SBI chairman,who had last year started the debate on abolishing CRR to enhance liquidity in the banking sector,stressed

that in times of rupee

volatility,the RBI must work in a frank,fair and transparent manner.