The 50 basis point reduction in the cash reserve ratio (CRR) should have an immediate impact of releasing about Rs.30,000 crore into the economy. In view of the tightness in the liquidity which has increased LAF borrowings by banks, this step is timely, said Pratip Chaudhuri, Chairman, State Bank of India.
“We consider that more than the open market operations (OMO), which has the impact of reducing the cost of borrowing from the government, reduction in CRR, improved liquidity for all sectors of the economy,” said Mr. Chaudhuri.
“The policy is likely to cool rates at the short end in particular, where rates are presently elevated,” he added.
Overall, said Mr. Chaudhuri, “given the headwinds that the global and domestic economy are facing, RBI has crafted a finely balanced policy aimed at easing liquidity conditions, mitigating the downside risks to growth and controlling inflation and inflation expectations in the economy.”
Aneesh Srivastava, Chief Investment Officer, IDBI Federal, said the RBI had changed its stance from tight monetary policy to moderation in rates and had given enough indication of softer bias in the months to come. This has come on the back of tight liquidity conditions faced by banks despite OMOs conducted by RBI to infuse liquidity.
Slowing global as well as domestic growth is one of the other reasons for change in bias.
“We expect that inflation and growth challenges to keep haunting economy till structural steps to improve supply side constrains are taken as well as more prudent fiscal policy is adopted.”
“RBI kept the repo rate unchanged as widely anticipated. The downward revision to growth for 2011-12 from 7.6 per cent to 7 per cent by the RBI highlights the concerns to growth. The RBI is likely to continue to hold the repo rate until April 2012 as upside risks to inflation still persists. While the cut in the CRR would ease the flow of credit to the productive sectors, it might add to the inflationary pressures as the growth in money supply still remains in line with RBI's indicative trajectory,” said Arun Singh, Senior Economist, Dun & Bradstreet India.
