Kamath led chief executives' call for a reduction in cash reserve
requirement if the central bank is serious about lowering borrowing
costs in the system, but voices seeking interest rate cut were feeble.
Demand for a cut in the repo rate, the rate at which the central bank
lends to banks, which has been a constant for nearly two years, is
fast vanishing from the thoughts of the industry as the currency slide
makes it meaningless. There are fears that a sustained fall in the
value of the currency could force the central bank to reverse its
stance and raise borrowing costs.
"We asked RBI to give relief on CRR and repo rate, and also asked RBI
to pay interest on CRR," Kamath told reporters after the customary
pre-monetary policy meeting with central bank officials. "We also
asked RBI to relax provisioning norms on restructured assets."
Quarterly monetary policy is scheduled to be released on July 30.
The near 12% slide of the Indian rupee since May is threatening to fan
inflation in the form of higher diesel and coal prices. Inflation as
measured by the WPI which fell below 5% may begin to climb again
throwing a spanner in the works. Industry, government and investors
have been lobbying for interest rate cuts to reverse the slump in
economic growth.
The repo rate is at 7.25% and the CRR, the proportion of deposits to
be kept at the RBI, is at 4%. "If the rupee remains at its current
levels (rupee averages .`58 per US$), average WPI inflation for
2013-14 would be closer to 6% rather than our baseline forecast of
5.3%," forecasts CrisilBSE 0.20 %, a rating company.
With little clarity on the way the Federal Reserve may go, governor
Duvvuri Subbarao could opt to pause on July 30. "While slowing growth
does call for a rate cut, a sharp rupee depreciation of 12% against
the dollar since April 13 and rising capital outflows of $8.8 billion
since May 22, would likely restrict rate cuts in the near term,
especially till the Fed's Sep 17 meeting," Religare Capital said in a
note.
Abank chief who did not want to be quoted said that bankers conveyed
to RBI that a cut in CRR will send a positive signal to corporates
that interest rates are moving southward and it will also enable them
to lower lending rates.
Last week, a few banks like Bank of India, Union Bank of IndiaBSE 1.91
% and Canara BankBSE 1.74 % cut lending rates due to pressure from
finance ministry. During the meeting with RBI, banks indicated that a
cut in CRR will result in a further reduction in lending rate.
In the past, SBIBSE 1.74 % chief Pratip Chaudhuri has categorically
said that the bank will be in a position to lower rate only if RBI
cuts CRR. SBI has pegged its base rate — the floor rate at which it
lends — stands at 9.70%.
During the meeting, bankers also told RBI that considers a reduction
in provisioning norms for restructured loans. As per the revised
guidelines banks have to make a provision of 5% for new restructured
loans and 3.50% on all the old restructured loans from March 2014.
Bankers told senior RBI officials that these provisioning requirements
are very steep given that the economy is facing a slowdown.
Restructured loans constitute 5-6% of banks' loan book.
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