RBI’s move to raise incremental CRR that has come as a shock to banks could also end up increasing transmission of deposit rates as the move will force banks to review their deposit rates to absorb more durable liquidity.
In his latest monetary policy statement, governor Shaktikanta Das imposed a temporary incremental cash reserve ratio (I-CRR) of 10% on incremental deposits received between 19th May and 28th July 2023 given the surge in surplus liquidity in the system. The I-CRR would be reviewed on 8th Sep’23
” This temporary measure announced by the Reserve Bank has come as a shock to banks, ” said Madan Sabnavis, chief economist at Bank of Baroda. ” Some of them will be forced to review their interest rates” Based on the available data the incremental NDTL from May 19 is Rs 10 trillion and there would be additional CRR requirement of Rs 1trillion for the system.
This implies that some banks may require to raise deposit rates and help improve transmission of deposit rates. ” Monetary transmission is still underway” said the ICICI Securities Report. During the accommodative phase of monetary policy, i.e., Feb’19 to Mar’22, wherein the repo rate declined 250bps, the weighted average domestic term deposit rate (WADTDR) on fresh deposits of scheduled commercial banks and the weighted average lending rate (WALR) on fresh loans had fallen by 259bps and 232bps, respectively. In the recent tightening phase, i.e., May’22 to Jun’23, the repo rate had increased by 250bps, fully offsetting the reduction in the easing phase. However, the increase in WADTDR on fresh deposits and WALR on fresh loans at 231bps and 169bps, respectively, trails the reduction seen in these rates during the accommodative phase.Some pressure on cost of deposits is visible in certificate of deposit rates which surged port the RBI measure. ” Weighted average overnight rate surged 8 bps to 6.44% (21 bps higher on a WoW basis). Further, the CD rates also moved up by 5-15bps following the I-CRR announcement according to Upasna Bharadwaj, chief economist at Kotak Mahindra Bank.
But at a bank level the impact may vary. ” But the extent of revision may vary from bank to bank” Sabnavis. ” At the system level, it would also depend how savings move to other asset classes such as mutual funds and small saving schemes”
HDFC Bank appears to be more sensitive to the incremental CRR requirement as it would have bloated NDTL post its merger with parent HDFC Limited according to a report by ICICI Securities The bank could have around Rs 5trillion additional NDTL on July 1st ,2023, effective date of merger. ” Our broad calculations suggest 5bps of NIMs impact for Q2 FY’ 24 for the merged entity assuming the incremental CRR requirement remains effective as announced till July 28. ” the report said
