RBI cuts CRR: Will March 15 credit policy be a non-event?

Moneycontrol Bureau

In a bid to pump liquidity into the banking system, the Reserve Bank of India has cut the cash reserve ratio (CRR) by 75 basis points to 4.75%, effective March 10. The move is expected to inject Rs 48,000 crore into the system. 

The CRR is the percentage of the deposits that a bank must not lend, but keep as cash with the Reserve Bank.

Experts unanimously welcome the step. While experts were expecting a CRR cut, the quantum has taken them by surprise. The market was expecting a cut of 50 bps.

Abheek Barua, chief economist of HDFC Bank says, 75 bps cut in CRR comes in as a surprise. "I thought 50 bps would be adequate, but 75 bps certainly gives them a lot of elbow room," he asserts. 

Sonal Verma, India economist of Nomura Financial also lauds the Reserve Bank and says that it has tackled the liquidity situation with the cut.

Also read: Experts welcome CRR cut; say timing is 'just right'

According to Mallya, chairman and managing director of Bank of Baroda, pressures on liquidity would ease considerably. He says it is a huge positive for the banks.

Meanwhile, S Raman of Canara Bank says, the RBI needed to cut CRR ahead of advance tax flows.

The RBI is scheduled to announce the mid-quarterly review of its monetary policy on March 15, a day before the presentation of the Union Budget 2012 in Parliament.

So, now what happens on March 15? Will it be a non-event?  Yes, says Barua. According to him, the central bank will wait for the Budget to decide on repo rate cut.

Like Barua, Samiran Chakrabarty, head of research of Standard Chartered Bank is also not expecting a rate action on March 15.

Chakrabarty is hesitant to connect this move with inflation or monetary policy stance.