There is a school of thought which is advocating the use of the Cash Reserve Ratio (CRR) with the RBI for infrastructure development, particularly the government’s proposed $1-trillion investment during the ongoing 12th Five-Year Plan. CRR, which is the money that scheduled commercial banks are required to maintain with the RBI to ensure liquidity and solvency of banks, could ease funding of infrastructure projects, they say.
At present, it is estimated that around Rs. 3 trillion is lying with the RBI as Cash Reserve Ratio (CRR) which roughly translates into $50 billion at current exchange rates. A section of economists and financial experts feel that that these CRR funds could partly be utilised for infrastructure development for a slightly longer duration with strong safeguards.
While the predominant view is that CRR is an essential tool to control inflation and ensure that the economy does not overheat, some experts feel that instead of raising funds from overseas markets, to finance India’s proposed $1-trillion infrastructure spend during the 12th Plan period, it would be better if CRR could be effectively tapped for the purpose.
Concurring with this view, Dr. M.S. Kapadia, Director, Economic Research India Pvt. Ltd, said that using a part, say, 25-50 per cent, of CRR money for infrastructure was a good idea provided, first, the government ensured speedier implementation of the projects, and second, it ensured that the repayment money flowed right back into CRR coffers within a specified timeframe. This would help mitigate the inflationary impact of more money supply on a sustained basis. Such swaps could be ensured by routing the money through a designated financial intermediary and debt instruments of diverse tenures.
Opposing the diversion of CRR funds for infrastructure development, Dr. V.K. Vijayakumar, Investment Strategist, Geojit BNP Paribas Financial Services Ltd, said, “Using CRR money for infrastructure funding will not be a good idea. In emerging markets in general and India in particular inflation is a major problem. CRR is a very effective and important monetary tool. Sometimes CRR will be more appropriate and effective in managing money supply and fluctuations in price level than even the policy rates. Therefore, if this money is used for funding infrastructure projects, the maneuverability of the RBI will be substantially reduced.”
Further, since commercial banks in general and PSU banks in particular are undergoing severe asset quality stress, CRR reduction and transferring the money back to the banks would be necessary to mitigate the problems being faced by the banks, Vijayakumar added.
Explaining the reasons for opposing the suggestion, Rikesh Parikh, Vice President – Equities, Motilal Oswal Securities Ltd, observed that CRR was a preventive measure. For instance, if a bank faced a liquidity crunch, this money which is kept with the RBI could be provided to the bank. As of today, banks have to keep some amount of money with RBI. Also, the RBI from time to time keeps changing the percentage of funds that banks need to needs as CRR.
Some experts are of the view that instead of tapping into CRR funds directly, the RBI could reduce the percentage of CRR thus making more funds available to the banks for lending to infrastructure projects.
However, the glitch is that although the banks would have more funds to disburse, what would be guarantee that those additional funds would be utilised only for infrastructure development and not diverted towards sundry purposes.
Whatever the merits and demerits of using CRR funds for infrastructure, India needs to develop alternate sources of funding apart from usual bank lending. To this end, India would need to strengthen the corporate bond market and develop credit enhancement mechanisms that will enable infrastructure projects to access long tenure funds available with domestic and foreign pension and insurance funds. India would also have to consider suitable regulatory changes for channelising greater amounts of foreign capital, especially debt capital, into Indian infrastructure.
But looking at the mammoth Rs.3 trillion lying with the RBI, the Cash Reserve Ratio could well be an alternative to fund infrastructure development provided adequate safeguards are in place.