SRR reduction to spur credit growth

The reduction of the Statutory Reserve Requirement (SRR) by 2 percentage points bringing down the rate to 6% (prev. 8%) is expected to ease market lending rates considerably, and is aimed at spurring credit growth within the private sector to stimulate the overall macro-economy.

The SRR is used as a monetary policy tool less frequently than policy rate cuts or open market operations. In the past 61/62 years, the SRR has been adjusted just 5 times. This is in contrast to policy rate changes which have occurred 13 times since 2007.

The reduction of the SRR thus implies that adjustments in general lending rates post the December ‘12 and May ‘13 policy rate cuts have been at a slower-than-desired pace.

Market annalists said that the reducing the SRR could also imply that GDP growth is occurring at a slower-than-expected pace.

Q1 2013 GDP grew at 6.0% Y-o-Y, a stark contrast to the previous two years when first quarter growth averaged 8%. On the monetary front meanwhile, broad money growth since 2012 has been on the decline.

Much of this decline has been due to the Central Bank’s stabilization policies introduced in early 2012 to curb the threat of an overheating economy.

Higher interest rates along with a credit ceiling and a weaker rupee have implied that credit to the private sector has been on a decline. By April 2013 the private sector credit growth was at 10.2% Y-o-Y, significantly lower than at the start of 2012 (34.3% Y-o-Y in January 2012).

Reducing the SRR is thus aimed at spurring credit growth within the private sector to boost the overall macro-economy.

A lower SRR implies that that proportion of rupee deposit liabilities that commercial banks are required to maintain as a deposit with the Central Bank is less than before.

This in turn implies that the funds available to Commercial Banks for dispersion will increase. At end-March 2013, Commercial Banks had Rs 2,914 bn in held in deposits.

The 2 percentage point reduction in the SRR now implies that an additional Rs 58.3 bn is available to commercial banks for disbursement1.

‘The greater availability of funds also implies that the cost of borrowing should be lower. Following the announcement and at close of trading on Wednesday (June 26) treasury yields across a number of maturities declined with the 12-month yield falling as much as 19 basis points to 10.66% an Acuity Stock Brokers release said.

Equity markets meanwhile, are likely to experience some positive impact given the relationship between equities and interest rates.

Since markets began pricing in a May rate reduction in April, equity markets surged 13.3% implying that further upside potential may be possible post the SRR reduction.

(SS)