Liquidity boost to improve core profitability at lenders
Reserve Bank of India's (RBI) first cut in the cash reserve ratio (CRR) since March 2020 is likely to provide much needed liquidity to the banking system, cooling off bulk deposit rates and lift core profitability of lenders by up to 5 basis points, bankers said.
One basis point is a hundredth of a percentage point.
The 50-basis point cut in CRR to 4% will release a total of ₹1.16 lakh crore into the banking system, helping banks lend more, although the lending rates are unlikely to be reduced. That should help lenders expand their net interest margins (NIM), or core profitability.
«The gap between one-year certificate of deposit (CD) rate (7.5% to 8%) and overnight money rates (6.5%) had widened. This CRR cut will cool off the bulk deposit rates. So far markets did not have the confidence that liquidity will remain easy for long,» said Rajiv Anand, deputy managing director, Axis Bank. «This move changes that perception because this means liquidity will remain easier for longer. All things remaining the same, bank margins should improve 3 to 5 basis points.»
While announcing the CRR cut, RBI Governor Shaktikanta Das said that systemic liquidity is expected to tighten in the coming months due to tax outflows, increase in currency in circulation and volatility in capital flows. The CRR cut in two equal tranches from the fortnight beginning December 14 and December 28 is consistent with the neutral policy stance of the RBI, Das said.
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