Market welcomes RBI's CRR cut but wants more

To stem the credit crunch crisis in the domestic market and inject liquidity into the market, RBI announced, Friday, that it would be cutting the CRR by 1 percent. Earlier, on Monday, the central bank had already announced a cut in the CRR by 50 basis points to 8.5 percent. The cuts will take effect from October 11.

According to apex industry chambers, the rate cut will ease the liquidity crunch but the central bank needs to do more to rescue the stricken market. "This would go a long way in injecting additional liquidity into the system, which is the need of the hour," said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).

The Federation of Indian Chamber of Commerce and Industry (FICCI) said the "confidence boosting" move will "inject the much desired liquidity in the system" and urged that other benchmark rates like repo rates should also be reduced.

Echoing the same view, Sajjan Jindal, president of the Associated Chambers of Commerce and Industry of India (ASSOCHAM), said, "It was high time that the central bank should also consider reducing the benchmark lending rate to ensure adequate liquidity in the system."

If this is not done infrastructure projects in the country would be severely affected, Jindal said.

India's banking sector echoed similar views.

"The reduction in the CRR is a welcome step given the current rupee liquidity conditions," said Chanda Kochhar, joint managing director and CFO, ICICI Bank. "This should have a cooling effect on the market and ease liquidity."

The RBI's decision will not only ease the credit crunch but will also soften the interest rates by unlocking Rs.60,000 crore of bank funds, said Allen Pereira, chairman and managing director, Bank of Maharashtra.

T.S. Narayanasami, chairman and managing director, Bank of India, feels that RBI needs to do more. "It (the CRR cut) is not enough. More and more doses need to come," he said.

Economists and market analysts feel the same way.

"This is a short-term reaction to a huge panic crisis and a possibility of a run in the rupee. I think they will try their best to prevent the rupee from breaching 50 per dollar," said Abheek Barua, chief economist at HDFC Bank.

"This was sort of overdue, the system was freezing up," Barua said, adding, "It is to address the liquidity crisis, it was indeed a crisis, and RBI has sent out a strong signal that it is concerned."

"They are trying to restore confidence in the domestic credit market. This should be seen as a positive because it is a proactive measure by the central bank. As regard to monetary policy, they may look at relaxing the statutory liquidity ratio now," said Sachchidanand Shukla, economist at Enam Securities.

Agrees K. Ramkumar, head of fixed income at Sundaram BNP Paribas. "This market is already in the ICU. It requires oxygen which has been provided by the RBI."

According to Rupa Rege Nitsure, chief economist, Bank of Baroda, RBI's move was expected "as the liquidity tightness has assumed serious dimensions for India."

"There has been recent news in the public domain that banks are not able to lend due to cash shortages," she said.

"CRR cut of 150 basis points would provide much needed relief to the strained overnight liquidity condition. It will also provide support to front end of the corporate curve and ensure India's insulation from the global financial meltdown," said Shobit Gipta, portfolio manager, ING Investment Management.

"It is a kind of relief, and will take care of immediate liquidity," said Deven Choksey, CEO of brokerage K.R. Choksey.

"It will have a positive impact on the market, but we think more steps are needed," he said.

Agrees Saugata Bhattacharya, economist at Axis Bank. "The extent and timing of the CRR rate cut was a little unexpected, though we were all beginning to expect a cut. Given the shortage of liquidity in the system, this was needed. I would hope they would do a 25 or 50 basis points repo rate cut, but that would not happen before the monetary policy review," he said.

"This step is because of the extreme tight liquidity situation. To tide over this situation the central bank is using the CRR which will immediately infuse liquidity into the system. A high CRR was serving no useful purpose at this juncture," said D.K. Joshi, principal economist at domestic ratings agency CRISIL.

"The CRR cut by 150 basis points signifies a turn in the direction. With global markets under serious stress and India also witnessing capital outflows the immediate challenge for the Reserve Bank of India appears to be liquidity," added Indranil Pan, chief economist at Kotak Mahindra Bank.

"The 12 percent inflation could be put on the backburner for some time as it is expected to ease due to significantly lower commodity prices," he said.

Citigroup Global Markets and Goldman Sachs said in research reports released on Friday, said RBI will keep liquidity management as its top priority.

While Citigroup said RBI could use a combination of cuts in the CRR or statutory liquidity ratio (SLR), unwinding market stabilization bonds and lending through repos to inject liquidity in the market, Goldman Sachs said lower industrial production, tight liquidity, asset deflation and financial sector stability will take precedence over inflation thereby supporting a further rate cut by RBI.