Over the last 45 days, RBI has lowered high Reserve requirements by up to 7% of deposits (20%+ of SLR/CRR), narrowed the repo/reverse-repo corridor by 150bps, and been proactively accommodative (rather than preachy) of banks’ liquidity and other needs. These actions are precipitated by extraneous events, possibly temporary in nature, and (in part) mirror global actions. But they could represent the beginning of a structural thaw in the overtly cautious and economically burdensome policy environment for India’s banks.India’s banks have always dominated the domestic financial landscape – garnering 50%+ of household savings and 90%+ of system deposits. They were, however, being increasingly challenged (on the savings and lending sides) by rapidly growing MFs, life insurers, and in-flowing foreign capital. This has probably changed with capital savers and users flocking to banks (with fairly implicit backing of the government/RBI), commercial banks now appear even more privileged.
2 comments:
So India is lowering reserve requirements while banks in the West are trying to increase their reserve ratios? But if I understand the post correctly, it seems India has historically had much higher reserve requirements, making this change something that could help bring a thaw in credit markets for what seem to be well capitalized banks?
RBI’s most recent liquidity injection ($22b, 3% of deposits) on top of aggressive monetary actions is focused at maintaining economic momentum, a relatively easy rate environment, and financial sector stability.
CRR and SLR cuts (since September) will up-front boost margins 35-40bps and support a 9% larger loan book with the same funding; narrower repo/reverse repo window will enable easier liquidity management. Effectively these measures boost bank profitability – but will also absorb, and call for, more capital.
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