Monday, August 13, 2012

Finance ministry wants RBI to pay 7% interest on CRR deposits

New Delhi, August 12: The finance ministry has suggested that the Reserve Bank of India pay 7% interest on the mandatory deposits parked with it by banks, one among several measures proposed to lower rates even if the central bank does not ease the monetary policy. Finance minister P Chidambaram will take a call on the proposal, which would eventually go to the RBI.

“This is one among the many measures we have suggested to bring interest costs down,” a senior finance ministry official told ET on condition of anonymity. Chidambaram had last week indicated that the government was aware of the high interest rates and said “carefully calibrated risks” could be taken to stimulate investment, suggesting some innovation from the government to lower rates.

Banks have to mandatorily park a percentage of their deposits, called the cash reserve ratio, or CRR, with the RBI. The central bank had stopped paying interest to banks on CRR in 2007. Finance ministry officials are of the view that if the RBI were to pay interest at the reverse repo rate, or the rate at which banks park their surpluses with it, then banks will be able to lower their deposit rates, and eventually, lending rates will fall. At present, the CRR rate is 4.75%.

If the RBI were to agree to the proposal, banks will earn 7%, the reverse repo rate, on this portion of funds, helping them lower the cost of funds that can be passed on to borrowers. The RBI had not cut rates in its June 18 policy review because of the high inflation and lack of fiscal consolidation from the government. An RBI official said the move may not bring down interest rates, as effective cuts in policy rates have not yet been transmitted by banks to borrowers.

“We have not seen any real transmission in spite of a 100 basis points SLR (statutory liquidity ratio) cut in July, 75bps CRR cut in March and 50 bps rate cut in April,” the official said. “So how will this (paying interest on CRR) help is still a mystery to us.”

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