New Delhi: Today, RBI Governor Shaktikanta Das announced the third bi-monthly monetary policy for fiscal year 24. The RBI’s six-member Monetary Policy Committee (MPC) met for three days from August 8 to 10. Today, the RBI held the repo rate at 6.5% unchanged. The central bank has raised the repo rate by 250 basis points (bps) since May 2022. For the most recent information, see our RBI Policy Live blog.
Live coverage of the RBI Policy Meeting: The Impact of Incremental CRR by Madhavi Arora
Madhavi Arora, Emkay Global Financial Services’ Lead Economist, describes the impact of incremental CRR:
> Imposing an incremental CRR (ICRR) of 10% on NDTL (from May 19 to July 28) would result in a temporary liquidity drain of 1.15 trillion/996 billion (ex HDFC twin merger). This assumes a 14.5% effective CRR for the time in question (4.5%+10%).
> However, assuming an ICRR of 10% and the existing CRR of 4.5%, the liquidity depletion would be 650 billion/ 548 billion ex-HDFC twin merger. The press briefing will provide clarity on the RBI’s evaluation of ICRR. However, we believe it must be the former (i.e. 14.5% effective CRR).
> Overall, this would result in some interest loss for banks, as banks would park short-term liquidity in STPL (short-term personal loans) and money markets rather than with the RBI in VRRR, which would also assist soften CP/CD rates.
> The immediate impact of the RBI absorbing liquidity through the ICRR will be a mild hardening of money market rates for borrowers such as NBFCs/corporates, while banks will see a slight impact on their NIMs (3-4 bps) depending on the instruments in which they were parking the money (assuming 14.5% effective CRR).
> That said, some banks (particularly PSBs) benefited more than others from the liquidity glut caused by the withdrawal of Rs2K notes, while others struggled to attract deposits by raising interest rates.
> However, all banks will be required to maintain ICRR, which may be interpreted as unjust to some institutions that did not benefit significantly from the 2,000 note removal (mostly PVBs).
> As expected, the RBI issued a warning shot to banks and non-bank financial companies about aggressive lending (unsecured loans) and the importance of maintaining adequate provision buffers. According to our banking experts, this will force regulated firms to maintain greater PCR or, at the very least, dissuade them from reversing provisions (thus influencing RoA).
Notably, among banks, ICICI, HDFC Bank, and Axis Bank have kept a significant contingency buffer (0.7-1.2%) and so should have no impact.
