1% reduction in CRR to release Rs 56,000 crore in banking sector: ASSOCHAM

Posted By: Religare
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1% reduction in CRR to release Rs 56,000 crore
With the decline in inflation figure shining as the silver lining amidst the gloomy state of global economy, the industry body Associated Chambers of Commerce and Industry of India (ASSOCHAM) suggested that at least one percentage point reduction in cash reserve ratio (CRR) could inject Rs 56,000 crore liquidity into the banking sector.

Additionally, it also called for reduction of repo rates by 50 basis points to ease mounting cost of borrowings on the consumers.

“A one percentage point reduction in CRR could release Rs 56,000 crore and help fund viable projects held up due to liquidity crunch... At the same time, CRR as applicable to banks must carry two to three per cent interest to ease cost of funds," said ASSOCHAM encouraging the Reserve Bank of India to consider the suggestion in the monetary review slated to be announced on January 24.

Currently, the CRR stands at six per cent, while the aggregate deposits of banks outstanding on October-end stood at Rs 56.38 lakh crore. Therefore, one per cent or 100 bps reduction in CRR will inject about Rs 56,000 crore in the banking sector, added ASSOCHAM.

Additionally, calculating the interest burden on the industry in accordance to the current CRR and interest rates, the mount constitutes to Rs 6,878 crore.

Therefore, in such a case if RBI reduces the repo rates by 50 bps and consequently, the same is followed by the State Bank of India (SBI), industry would be saving about Rs 1,528 crore in interest payments.

Adding to cherry to the cake, if CRR is reduced to one per cent, it would further give substantial relief by way of interest to the banking sector to counter growing borrowing costs.

“This is not a large amount as such and therefore a cut in repo rate at this juncture will be more symbolic and play on the sentiments. The real gains will be seen only when the cycle is completely reversed," said ASSOCHAM Secretary General D S Rawat.

Dion Global Solutions Ltd

Read more about: rbi, crr, slr, inflation
Story first published: Tuesday, January 17, 2012, 23:30 [IST]
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