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RBI urged to unwind slowly
Published on 19 Sep. 2009 11:58 PM IST
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Banks have urged the Reserve Bank of India (RBI) not to unwind its expansionary policy in a hurry, even as they see strong signs of an economic revival. RBI governor D Subbarao on Friday met the CEOs of large commercial banks to seek their views on liquidity, interest rates and inflation. Mr Subbarao also obtained information on credit and deposit growth and bad loans from select bankers. Most CEOs said they were witnessing fresh demand for credit from the retail and core sectors. However, they were quick to add that RBI should slowly unwind the expansionary policy, said an official present in the meeting on the condition of anonymity. However, there was one section of bankers who were not very optimistic about the revival. “We are concerned over the stock market rally as it does not depict the development in the real economy. Share prices are rising too fast for comfort even as the real economy continues to be in stress. Agriculture, SMEs and exports are yet to show signs of revival,” said a banker in the meeting. He added that capital inflow from overseas should be watched closely. Bankers indicated to RBI that they would be well poised to meet the 20% credit growth target. With regards to interest rates, they expected rates to stabilise at current levels. However, towards the fourth quarter, rates could firm up if credit demand improved and inflation started rising, they added. The bank chiefs also urged RBI to hike the statutory liquidity requirement and the share of government securities that can be parked in the held-to-maturity (HTM) basket. As of now, banks have to invest 24% of their deposits (demand and time liability) in government securities. Of their g-sec investments, bonds representing up to 25% of deposits can be parked in the HTM basket. Banks do not have to make any mark-to-market provisions on the securities held in their HTM basket in case prices of securities fall. One reasoning for the increase in SLR requirement is that it will help the government in successfully completing its huge borrowing programme. It many be recalled that a year ago, RBI reduced SLR from 25% to 24%. The RBI governor will be meeting the CEOs of select banks again on October 12 as a prelude to the monetary policy scheduled at the end of the month.

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