Surplus liquidity in banking system

With surplus liquidity in the banking system, the banks should not rush into increasing their lending and deposit rates despite the Reserve Bank of India (RBI) raising the benchmark, Repo rate, the ASSOCHAM has said.

“In the policy presentation on 1 August 2018, the top RBI brass said it clearly that there is generally a lag between the announcement of a rate change and transmission in the system. If this holds true in the cases where the Repo rate was dropped, it should also hold true now that the benchmark lending rates have been tweaked up”, ASSOCHAM spokesman said.

The RBI itself has stated in the credit policy review document of 1 August that the “systemic liquidity has remained generally in surplus mode during June-July period”.

The ASSOCHAM said while the RBI has been doing a good job in managing the day to day liquidity in the banking system, the banks need not rush into raising the lending rates. The credit demand has not been rising with much of a speed either.

“The state of economy is poised at a very delicate stage. There is an upward growth bias; but it cannot be taken for granted. Interest sensitive sectors like automobile, consumer durables, real estate have a great multiplier effect and should not be burdened with the rising interest costs. Increased interest costs act like a double whammy. The cost of production goes up while consumer demand gets subdued”.

The chamber said, “Let there be a lag between the increase in the Repo rate and the transmission. On the other hand, the corporate India and the trade would use this window effectively for bringing in operational efficiency so that the effect on the ground does not show much of a cost change. The industry would be able to absorb the cost while the consumers should continue giving a demand push to the consumables”.

In this context, the GST Council, has done a commendable job in responding to the situation and dropping the GST rates on a number of items. “More items should be brought down from the 28 per cent slab to give a push to the consumer demand. Combined with operational efficiency, the demand should then remain strong,” it said.

“In the meanwhile, the banks should be refraining from raising the interest rates,” said ASSOCHAM. fiinews.com