Here is why banks stocks are falling on RBI's CRR strike

Demonetisation has led to a sharp spike in deposits with banks. Reserve Bank of India (RBI) on November 26 said all scheduled banks shall maintain an incremental cash reserve ratio (CRR) of 100% for all net demand and time liabilities (NDTL) gathered between September 16 - and November 11, 2016. 

However, it looks like banks are not happy with the RBI’s surgical strike movement on liquidity.  

Shares of both public and private banks tanked on NSE index, in the range of 0.40% - 3.40%. 

As per Care Ratings this decision will have a negative impact on the banks. It said, “An additional sum of Rs 3.24 lakh crore has to be kept with the RBI and earn no interest. Secondly, this amount, which is incremental deposits between Sep 16 and Nov 11, would be still paying a minimum of 4% interest to deposit holders. Lastly fear of penalty will be among banks in case if they fail to make the deposits with RBI.”

Presently, banks are not paid any interest on behalf of the RBI for parking the required cash. In case a bank fails to meet its required reserve requirements, the RBI is empowered to impose a penalty by charging a penal interest rate.  

Till now, public and private banks together have exchange and deposits of more than Rs 5 lakh crore in reverse repo auctions in various maturities.

Care Ratings said, “This has been necessitated by the fact that the RBI presently holds Rs 7.56 lakh crore of rupee securities like Government Securities (G-Secs) and Treasury Bills (T-Bills), which is expected to soon run out of options of going in for reverse repo auctions.”

RBI sells G-Secs in return for cash from banks which have surplus deposits, at the rates between 6.21-6.25%.

Meanwhile, as the liquidity under banks keeps increasing, they will have to mandatorily park their increments as CRR with RBI, for which Care feels will affect banks profit & loss account.

Expectations are that volume of deposits may reach to Rs 10 lakh crore by December end on the back of demonetisation of Rs 500 and Rs 1000 notes.

It said, "The present equation of Rs 3.24 lakh crore impounded by CRR and Rs 7.56 lakh crore to be used as OMO (open market operations) /reverse repo auctions broadly covers this amount leaving no extra margins.”

The CRR indicates to the fraction of the total NDTL of a Scheduled Commercial Bank held in India, that it has to maintain as cash deposit with the Reserve Bank of India (RBI).

Talking on the upcoming monetary policy Care Ratings said, "The expectation so far has been that the RBI will lower the repo rate aggressively in the December policy by 50 bps. This may be deferred till stability is achieved in the system."