Since the banking system of India is struggling with a liquidity deficit, questions have been raised on the role of the cash reserve ratio (CRR). He was debated the question of whether the CRR, which forces banks to hold part of their deposits with the Reserve Bank of India (RBI), remains relevant in its current form. Although the CRR has long been a crucial component of monetary policy, has it lost its effectiveness in the current banking landscape?
This question was the objective of the discussion on the Business Today Banking & Economy Summit prices and the best banks, during a panel session entitled ‘Deposit and Flows: The Macro Challenges
“The CRR has been used more to ensure the integrity of the system rather than a monetary policy tool,” said Madan Sabnavis, chief economist of Bank of Baroda, highlighting a change in its goal over time. With the banking sector subject to strict liquidity requirements, it is increasingly worrying that the CRR is no longer the most effective mechanism for managing liquidity.
Madhavi Arora, chief economist of Emkay Global, underlined the conditions of close liquidity imposed by the standards of liquidity coverage (LCR). “LCR standards are too tight; there could be a room for maneuver on the other side to allow banks to breathe in terms of attenuation of CRR’s liquidity,” she suggests. Since banks are already linked by multiple regulatory liquidity constraints, the relaxation of the CRR requirement could provide them with an essential operational flexibility.
Despite these concerns, the concerns were raised against the completely elimination of the CRR as a political tool. Mridul Saggar, professor and chief of the Center for Macroeconomics, Banking & Finance in IIM Kozhikode, he is worried about the current level of the CRR having an impact on financial stability, he is concerned about his full withdrawal. “I do not worry that the level of CRR has an impact on financial stability, but I worry if it is completely removed as a tool,” he warns.
As a potential solution, Sabnavis suggests making the CRR more effective by aligning it better with LCR requirements. “Since we have to live with the CRR, if we can make it more effective in terms of adjustment in the LCR, this will help the banking system a lot,” he explains. Such an approach could find a balance between maintaining financial stability and offering banks the flexibility of liquidity required.
