Banks do not want liquidity to fall and ask the RBI not to hike the CRR further.

Indian lenders have asked the Reserve Bank of India (RBI) not to raise the cash reserve ratio (CRR) threshold further in the upcoming monetary policy to ensure uninterrupted credit growth in the face of a visible reduction in surplus liquidity since early May, according to two people familiar with the representations.

The Indian Banks Association (IBA) submitted the demands to the central bank on behalf of the lenders last week, after surplus liquidity fell to approximately 3.5 lakh crore - almost half the level maintained by the RBI throughout the epidemic.

"Previously, surplus liquidity was hovering around 6 lakh crore; today it's about half of that," a banker remarked. The most recent rise in the CRR to 4.5 percent drained around 90,000 crore from the system.

In Neutral Liquidity Mode, the system The cash reserve ratio is the percentage of deposits held by banks with the RBI. "With hopes that loan growth would pick up in the second quarter, we have advised the regulator not to raise CRR, given the reduction in surplus liquidity in recent months," the banker noted.

Market participants polled by ET ahead of the central bank's policy statement later this week have not ruled out another rise in the CRR as the central bank strives to contain inflation.According to another banker, the system is already in neutral liquidity mode.

"According to the regulator's estimates, neutral liquidity situation is +/- 2% of net demand and time liabilities, which should keep normal liquidity levels around 3 lakh crore," the cited source added. "If the CRR is raised further, the system will be in a liquidity shortage. We are nearing the peak of the credit season, and such a move will cause a bottleneck."

The Indian Banks Association did not react to an email sent by ET.
On May 4, the RBI convened an off-cycle monetary policy committee meeting and announced a 40-basis-point rise in the repo rate to 4.4 percent and a 50-basis-point increase in the CRR to 4.5 percent.

According to the monetary policy committee, the deteriorating inflation forecast required prompt action to prevent inflationary pressures. According to economists, the increase in CRR resulted in a margin compression of almost 3 basis points for the banking sector.

To be sure, experts pointed out that the proposal not to raise the CRR threshold is motivated in part by the fact that the regulator does not pay interest on CRR balances held by banks. Indian banks had deposited 8.17 lakh crore in CRR with the RBI as of May 27, 2022. "CRR holdings provide negative returns for banks since they must reimburse depositors on those money; hence, banks do not want the regulator to raise the CRR any higher."