RBI cuts CRR by 50 basis points, interest rates may fall

Mumbai: Moving to ease pressure on interest rates, the Reserve Bank of India (RBI) on Monday cut by half-a-per cent the rate of mandatory deposits that commercial banks need to park with it and joined central banks worldwide that are injecting liquidity into their system.

The Cash Reserve Ratio (CRR) will fall to 8.5 per cent from October 11 and the move would release about Rs 20,000 crore into the financial system, the RBI said in a statement.

This is the first time since June 2003 that the RBI has reduced the CRR. The cut then was 25 basis points. The announcement comes three weeks ahead of a scheduled half-yearly review of the credit policy.

On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the CRR by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL), RBI said.

Worldwide, central banks have been taking steps to infuse liquidity in the banking system to prevent a credit crunch and panic withdrawals.

"Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned or limited short selling of financial stocks," RBI added.

According to Oriental Bank of Commerce Executive Director H Ratnakara Hegde said the move would ease liqudity pressure from the banking system and credit flow would ease.

It would also help in easing pressure on interest rates in the medium term. But immidiately there would not be any decline in interest rates, he said.

Going by the liquidity crunch in the market in the last few weeks, it was expected that the apex bank would come out with measures to ease pressure, Hegde said.

Hinting at further liquidity infusing steps, RBI said this measure is ad hoc, temporary in nature, and will be reviewed on a continuous basis in the light of the evolving liquidity conditions.

Following the global financial turmoil, the RBI announced several measures to alleviate the pressures on domestic financial markets brought on by external developments.

The central bank on September 16 indirectly reduced statutory liquidity ratio, wherein banks are required to park money in government securities, by one per cent at 24 per cent. This was followed by easing of external commercial borrowing norms to give industry access to cheaper funds.

"There has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained," RBI said.

The apex bank noted that developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF.

Active liquidity management is a key element of the current monetary policy stance, it said.

RBI also said that the overall stance of monetary policy is price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.