Contact Your Financial Adviser Money Making MC
5
December 2016
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R.B.I (The Total Investment & Insurance
Solutions)
The
Reserve Bank of India (RBI) should either reduce or abolish the incremental
cash reserve ratio (CRR) for banks with immediate effect because it is putting
enormous strain on the banking system and instead, the central bank should
adopt a non-disruptive mode of liquidity absorption, says a research note. The Total Investment & Insurance Solutions
In
the Ecowrap report, State Bank of India (SBI), says, though, banks have
received ample deposits during 16th September to 11 November 2016 period
(Rs3.76 lakh crore) and post demonetization (Rs8.1 lakh crore during 10-27
November 2016), incremental CRR is putting an enormous strain on the banking
system. "Due to incremental CRR, for every Rs100 incremental growth in
deposits banks have to maintain of Rs124.75 (CRR=Rs4 + statutory liquidity
ratio (SLR)=Rs20.75 + incremental CRR=Rs100). Thus, for the accretion of Rs3.76
lakh crore in deposits, banks have to maintain Rs4.69 lakh crore in regulatory
ratios. Apart from this, banks will have to maintain 70% liquidity coverage
ratio (LCR) depending upon the category of the incremental liability," the
report says. The Total Investment & Insurance
Solutions
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Liquidity (The Total Investment & Insurance
Solutions)
To
manage the excess liquidity in the system due to demonetisation, the central
bank has revised ceiling for issue of securities under the market stabilisation
scheme (MSS) to Rs6 lakh crore from Rs3,000 crore. On 2 December 2016, the RBI
absorbed Rs20,000 crore by issuance of 28 days cash management bills (CMBs) and
also has announced the auction of the 35 days CMB for a notified amount of
Rs60,000 crore. In addition to the Rs2.09 lakh crore outstanding under reverse
repo, RBI also has auctioned four government papers on 2 December 2016 and
sucked Rs13,915 crore of liquidity from the system. The Total Investment & Insurance Solutions
SBI
says, "We understand the current predicament of RBI in managing liquidity
and hence would not be surprised if the 50 basis points (bps) rate cut is
factored with a widening of repo-reverse repo corridor to 100 basis points.
This could achieve a nice trade-off between an aggressive repo rate cut and a
lower reverse repo rate. This would also hasten a downward trend in G-sec yield
movements, a crucial factor in higher provisioning by banks in the quest for
balance sheet clean-up." The Total
Investment & Insurance Solutions
"Our
estimate indicates that between 10th November to 30 December 2016, banks will
receive around Rs12.94 lakh crore as deposits in the form of high denomination
notes," SBI says, adding, "Even if we safely assume 85% withdrawal
rate, the deposits that will be kept with banks will be Rs1.94 lakh crore, of
which banks have to keep Rs48,100 crore in the form of CRR and SLR investments.
Hence, the net liquidity that will remain in the system will be Rs1.46 lakh
crore. Of this, even if we assume a trend credit growth, and Rs42,000 crore of
auction of G-secs in December 2016, with the ceiling of Rs6 lakh crore under
MSS, RBI can thus easily absorb the excess liquidity from market." The Total Investment & Insurance Solutions
According
to SBI, capital outflows of around $7 billion have possibly put the RBI in a
policy dilemma to cut rates aggressively in the forthcoming 7 December 2016
monetary policy. "With the 10-year yield differential between US and India
now declining to around 390 bps from an average of around 584 bps, there is now
a danger of sustained capital outflows. We however believe that such a fear is
unwarranted. Consider this data. In FY16, the yield differential was 562 bps,
still there was a portfolio capital outflow of $2.5 billion. How can one then
explain such a contrarian analogy? Thus, we are factoring in a repo rate cut of
50 bps on 7th December by RBI," it concluded.The Total Investment & Insurance Solutions
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