RBI to cut down "pre-emptions" to spur efficiency, says Raghuram Rajan

A day after he lowered Statutory Liquidity Ratio (SLR), Reserve Bank Governor Raghuram Rajan on Wednesday said that RBI was all for reducing "pre-emptions" over a longer horizon for more efficiency in the financial system.

"The broader, longer term programme of five years, is that we should reduce the amount of pre-emptions we have in the system including SLR and make a more effective priority sector lending (PSL) process," Rajan said during the customary post-policy call with analysts.

Rajan drew attention towards the Nachiket Mor committee on PSL and said that the RBI was trying to make the entire process more effective.

"These are necessary changes in the system and should not be seen as tied to the monetary cycles," he added.

Various stakeholders in the system, including the banks, have been expressing reservations about the pre-emptions like the SLR and CRR. In the present scenario, banks have to invest 22 per cent of their deposits in government securities and 4 per cent gets parked as cash reserve ratio without any interest payment.

Banks carry out lending on whatever remains, and 40 per cent of the lending as well is mandated to be done to weaker sections of the society under the PSL.

Rajan conceded that Tuesday's 0.50 per cent cut in SLR, the mandatory government bond holding requirements for banks, was not going to have any real impact in the immediate future and added that banks wwould continue carrying excess SLR for the "foreseeable future".

The cut in the SLR holding requirement, which has the potential to release an additional Rs 40,000 crore into the system, offered banks the flexibility to manage their finances better when the credit demand would go up, he said.

"Going forward, we would investigate the conditions in both the credit market as well as the bond market and make appropriate decisions at that point," Rajan said, asserting that banks would continue to be present in the government securities market.

When asked about the limit for foreign institutional investors' investments in government securities, Rajan said the RBI is happy with their renewed interest and also acknowledged their preference for longer maturity debt of over three years.

After the RBI cut the hold-to-maturity (HTM) limits for banks on Tuesday, to help tide over any liquidity troubles, Rajan on Wednesday said there was no pre-determined path with which the central bank was working.

On the liquidity management front, he acknowledged that there had been some volatility in the recent past, saying that RBI would soon come up with some measures to reduce it.

RBI Deputy Governor H R Khan said that the government had some reservations about disclosing its balances with the central bank to the public.

The Reserve Bank, he added, was in discussions with the government to get to know the balances in real time.