RBI cuts CRR by 50 bps, leaves policy rates unchanged

Moneycontrol Bureau

The Reserve Bank of India (RBI) has slashed the cash reserve ratio (CRR) by 50 basis points (bps) to 5.5% effective from January 28, 2012. The  cut is expected to infuse Rs 32,000 crore into the system easing the tight liquidity situation.  However, it has left its key policy rates unchanged in its third quarter monetary policy (October-December).

CRR is the fixed portion of the total deposits or the net demand and time liabilities (NDTL) that banks mandatorily have to keep with the Reserve Bank of India. Currently, it is at 6%. This means, for every Rs 100 deposits with the RBI, banks will have to set aside Rs 5.50 as CRR instead of Rs 6.

RBI has hiked the policy rates 13 times since March 2010. However, the reverse repo and repo rates were left unchanaged at 7.50% and 8.50% respectively in the last two credit policies in accordance with the market expectation. However, a section of market participants were indeed anticipating a small cut in the CRR. Since 2009, this is the first time the RBI went for reducing the ratio.

"In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance," D Subbarao, the governor of RBI said in a statement.

"Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate. However, the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time."

Banks are seen borrowing around 1.30-1.40 lakh crore on an average on daily basis from the RBI's repo window at 8.50%. According to analysts, the borrowing level is significantly higher than the average level of around Rs 70,000-80,000 crore. Through repo counter, the RBI lends to banks meeting their liquidity requirment.

Meanwhile, RBI has cut FY12 gross domestic product forecast to 7% from 7.6%. It has kept inflation forecast unchanged at 7%.

saikat.das@network18online.com

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