Reserve Bank of India CRR reduced to 5.5% from 6%

MUMBAI: Home loans and other loans to individuals and businesses are set to become cheaper with Reserve Bank of India releasing Rs 32,000 crore to banks through a half percentage point cut in the cash reserve ratio (CRR) on Tuesday, a step which is also aimed at driving growth.

The CRR, which is the level of deposits that banks have to mandatorily maintain with RBI, was reduced to 5.5% from 6%. This marks RBI's first reduction in CRR since January 2009 when it had released funds to stimulate demand in the wake of the Lehman Brothers crisis.

Bankers that TOI spoke to said that interest rates are headed down and it was a matter of time before lending rates also dip. Pratip Chaudhuri, chairman of the country's largest lender State Bank of India said that interest rates will come down on loans to certain sectors where there is good growth and low delinquencies. However, banks might be circumspect about reducing deposit rates since there are many tax-free schemes offering returns ranging from 8.3% to 8.5%.

Release of liquidity on account of CRR cut by RBI comes at a time when banks are seeing a slowdown in credit growth and have indicated to the central bank that actual growth may be around 16% as against the targeted 18%.

"The rate cut has lifted the mood and we should see an increase in (loan) volumes going ahead" said Chaudhuri. Keki Mistry, vice chairman and CEO, HDFC, however, doesn't expect rates to come down immediately. "I expect that in FY2012-13 interest rates will come down by around 150 basis points," he said.

The RBI move was cheered by the markets with the Sensex crossing the 17K level in intra day trades and the Rupee appreciating against the dollar to go below the Rs 50 mark in intra day trades.

Announcing the reduction in CRR, RBI governor D Subbarao said he decided to reverse a two-year policy of interest rate hikes because of decelerating growth although inflation continued to remain a concern. He said the central bank was prompted to ease liquidity because of a'structural shortfall' which was forcing banks to borrow anywhere between Rs 1.25 lakh to Rs 1.5 lakh from RBI in January.

RBI also lowered its growth forecast to 7% from 7.6% earlier. Subbarao said growth was slowing down because of global and other domestic factors in addition to the delayed impact of rate hikes by RBI over the past two years. "RBI has indicated that interest rates have peaked and over a period of time one could look at interest rates softening" said MD Mallya, chairman, Bank of Baroda.

The CRR cut is a positive development for banks which can earn interest income of over Rs 3,000 crore on funds which were hitherto locked with the RBI. SBI, for instance, with deposits of Rs 9.7 lakh crore, will see its lendable funds augumented by nearly Rs 5,000 crore. Considering that the bank can earn 8.5% by merely lending the money back to RBI, the bank could see its profits rise by over Rs 400 crore if it did not cut down lending rates.