Reduction in CRR to induce liquidity: CARE Ratings
CARE Ratings has come out with its report on "third quarter monetary policy review-FY13". According to the rating agency, the reduction in CRR will induce liquidity and alleviate the present liquidity strain in the system and provide more funds to banks which will enable them to lower their interest rates.
January 29, 2013 / 19:02 IST
CARE Ratings has come out with its report on "third quarter monetary policy review-FY13". According to the rating agency, the reduction in CRR will induce liquidity and alleviate the present liquidity strain in the system and provide more funds to banks which will enable them to lower their interest rates.
The Government has initiated a number of steps in the last few months to manage its fiscal deficit and has also brought about changes in its policy structure to support growth. Against this background, with inflation also reaching more acceptable levels, the RBI policy has attempted to address the issue of growth in its policy announced today. RBI has cut the CRR by 25bps and repo rate by 25bps which should hopefully make banks lower their base rates which in turn will help investments. The reduction in CRR will induce liquidity and alleviate the present liquidity strain in the system and provide more funds to banks which will enable them to lower their interest rates.The Reserve Bank of India in its Third quarter Monetary Policy Review reduced its key interest rates by 25 basis points and reduced Cash Reserve Ratio (CRR) by 25 bps in order to encourage investments and to ease the liquidity conditions in the banking system to support credit flow.CRR, the proportion of the net demand and time liabilities (NDTL) that banks have to hold with the RBI, has been reduced by 25 bps to 4.00% effective from 9th February 2013. The 25 bps cut in the CRR would infuse approximately Rs. 18,000 crore of primary liquidity into the banking system. This amount may not be very significant given that presently the amount of money being borrowed from the RBI through the repo window is around Rs 1 lakh crore. Nevertheless, to the extent that this money will flow into the system, banks will be marginally better off.Revised Macro and monetary estimatesThe RBI has revised downward its GDP forecast for FY13 to 5.5% from 5.8% earlier. This is significant as it is an admission that the slowdown is serious which has probably also played its part in the RBI’s decision to lower rates. Also its expectation of WPI inflation is 6.8% by March end, though this would be a gradual movement. Earlier, the RBI had a number of 7.5% in mind. Money supply growth for the year is also expected to slow down to 13% from 14%. No change is however expected in growth in non-food credit at 16%.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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