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Updated: March 9, 2012 22:35 IST

RBI cuts CRR by 75 basis points

Special Correspondent
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The Reserve Bank of India (RBI) on Friday reduced the Cash Reserve Ratio (CRR) by 75 basis points from 5.5 per cent to 4.75 per cent with effect from March 10.

“This reduction will inject around Rs.48,000 crore of primary liquidity into the banking system…….to ensure smooth flow of credit to productive sectors of the economy,” said the RBI.

CRR is the percentage of deposits that commercial banks must keep with the central bank.

The markets were expecting a reduction in CRR as the banking system was experiencing a liquidity tightness in the recent days. However, the reduction in CRR at this point surprised markets as the RBI was expected to provide its assessment of the macroeconomic situation in its fourth Mid-Quarter Review on March 15. Moreover, this cut was sharper than expected.

Earlier, in its third quarter review in January last, the RBI reduced the CRR by 50 basis points from 6 per cent injecting a liquidity of Rs.31,500 crore into the banking system to mitigate the tight liquidity conditions, which was the first move in the CRR since it was increased to 6 per cent in April 2010.

The RBI's action now is apart of its continued efforts to provide liquidity through open market operations (OMOs), injecting primary liquidity of over Rs.1,245,00 crore this financial year so far, of which Rs.52,800 crore was injected after the CRR cut in the third quarter review.

Despite these measures (OMOs as well as the earlier cut of 50 basis points in CRR), the RBI said that “the liquidity deficit has remained large on account of both structural and frictional factors.”

This was reflected in the net average borrowing rising from an average of Rs.1,292,00 crore in January 2012 to Rs.1,405,00 crore in February. Net injection of liquidity through other measures rose to a peak of Rs.1,917,00 crore on March 1, 2012, though, subsequently, it declined to Rs.1,273,00 crore on March 7, 2012.

Further, the liquidity deficit is expected to increase significantly during the second week of March due to advance tax outflows and the usual frontloading of cash balances by banks with the Reserve Bank. Thus, “the overall deficit in the system persists above the comfort level of the Reserve Bank.”

Bankers welcomed the RBI's move on Friday. “CRR cut was expected. It was a pleasant measure and will ensure adequate funds for lending to productive sectors. The release of about Rs.48,000 crore will also marginally reduce pressure on margins. Overall, a huge positive for the economy and to the banking sector. Sentiment will be far more positive,” said M. D. Mallya, Chairman and Managing Director, Bank of Baroda.

“The 75 basis point CRR cut is a proactive step by the RBI to inject permanent liquidity into the system. This is expected to bring down the high level of overnight borrowing by banks from the RBI. This would also ensure continued smooth flow of credit in the corporate and retail sectors,” said Chanda Kochhar, Managing Director & CEO, ICICI Bank.

More In: Economy | Business

rightly said by Chanda Kochhar, a "proactive" step by RBI. will
definitely give boost to productive sectors. will also ease the margins.
RBI has felt the need for injecting money into the banking system at a
right time. it was not expected though needed very badly.

from:  CA. Pankaj Sharma
Posted on: Mar 10, 2012 at 09:39 IST

This additional liquidity is a wrong move at a critical time of world economic shake up. Indian govt due to slow down in growth and economy, ensuing budget and instability has necessitated this action but cites "other reasons" which appear attractive to the industry and business. When critically gold and dollar going up in arms and stronger in the world market will eat away any gain that could come out of this ill timed move.This pumping of additional flow will evaporate into thin air in no time. Instead to pass the budget the government should cut down unproductive expenditure and sail through. Our indian leaders are empty and short sighted, they simply react to short to term pains and gains, a very unfortunate situation. It is quite evident that all ministries of the indian government dont work on co-ordination and tandem.

from:  Sastri Arunachala
Posted on: Mar 9, 2012 at 22:17 IST
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