The Reserve Bank of India (RBI) on Monday cut the Cash Reserve Ratio (CRR), the portion of deposits that banks keep with it, by 0.25 percentage point to 4.50 per cent, pumping in Rs.17,000 crore into the banking system. It will be effective from September 22.

The RBI, however, kept other policy indicative rates at the same levels.

Though there is enough liquidity in the system, the RBI chose to release these funds in view of the seasonal pick-up in credit demand in the second half of the year, combined with outflows on account of advance tax payments and the onset of festival-related currency demand. These “could accentuate pressures on liquidity over the next few weeks,” the RBI said in its mid-term review of the monetary policy.

The move is likely to reduce the liquidity pressure on banks, avoiding a rate hike, which means that as funds are released, banks may even compete to reduce rates on retail loans in the festive season. “For the moment, inflationary pressures, both at the wholesale and retail levels, are still strong. Headline Wholesale Price Index inflation has remained sticky at 7.5 per cent throughout the current financial year so far… Even as demand pressures moderate, supply constraints and rupee depreciation are mounting pressures on prices, rendering them sticky,” the RBI said.

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