RBI will consider cut in banks' reserve requirement

The Reserve Bank of India (RBI) will consider a further reduction in banks' reserve requirements to help ease tight cash conditions, a deputy governor said.

The RBI cut the cash reserve ratio (CRR), the proportion of deposits that banks must keep with the central bank, by 50 basis points in January -- the first policy shift after two years of fighting inflation.

The reduction, which released 320 billion rupees, and 905.54 billion rupees of debt bought by the RBI since November have been overwhelmed by heavy government borrowing and withdrawals by bank depositors.

Borrowings by banks through the daily repo auctions of the RBI indicate the shortfall in funds at nearly twice the central bank's comfort zone of 600 billion rupees since mid-December.

"To the extent an opportunity for CRR cut is available, we will also consider that," Subir Gokarn, who handles monetary policy at the RBI, told reporters on Tuesday on the sidelines of an industry event.

He reiterated his earlier stand that CRR moves should be undertaken only at the central bank's policy reviews. The RBI is scheduled to consider policy on March 15.

The option to buy government bonds from the secondary market through open market operations is also on the table, he said.

Government bond yields fell on the comments, with the 10-year benchmark 8.79 percent 2021 bond down 2 basis points at 8.17 percent from beforehand.

The benchmark five-year swap rate shed 3 basis points to 7.30 percent, while the one-year rate dropped 4 basis points to 8.05 percent.

Consumer price data released on Tuesday by the government showed inflation pressures are moderating, adding weight to views that the central bank has room to cut interest rates.

While a fall in non-food inflation was reassuring and validated the view that interest rate cycle had peaked, there was no data yet to call for a change in the RBI's policy stance, Gokarn said.

"...A new risk factor has emerged in the form of higher oil prices. We have to see how persistent that is, how long that particular pressure lasts," he said.

Brent crude futures were near $120 a barrel as the euro zone approved a second bailout package for debt-laden Greece, while a cut in Chinese and European imports of Iranian oil supported prices.

India imports more than 80 percent of its oil requirements and any increase in oil prices affects domestic inflation, which eased to a 26-month low of 6.55 percent in January.