The Hindu Business Line : RBI cuts cash reserve ratio

Mumbai, Oct. 6 In a bid to ease the current cash crunch in the financial system, the Reserve Bank of India on Monday announced a half percentage point reduction in the cash reserve ratio (CRR) to 8.5 per cent from 9 per cent.

The revision in CRR, which will come into effect from the fortnight beginning October 11, 2008, will release Rs 20,000 crore into the system, RBI said in a statement on Monday.

CRR is the portion of the deposits banks have to keep with the Reserve Bank of India.

The CRR cut will now increase the lendable resources of banks, which had been tightening their loan taps as liquidity came under pressure.

“This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,” the statement said.

This is the first time in the last five years that the central bank is reducing CRR, the last cut being in June 2003. Since then, RBI had resorted to CRR hikes several times to soak up excess liquidity.

Monday’s decision to cut CRR by 50 basis points follows the series of measures announced by the RBI on September 16 to ease the tight liquidity conditions due to the turmoil in the global financial markets.

“Since then (after the September 16 measures), 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. These developments have impacted domestic money and forex markets with a marked increase in volatility and sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and high recourse to the LAF,” the RBI statement said.

Despite RBI injecting more than Rs 90,000 crore, on an average a day, through its LAF window, the overnight call rates rose to as high as 17 per cent last week with demand for funds exceeding supply.

RBI said in view of the evolving environment of heightened uncertainty, volatility in the global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority over the period ahead.

The RBI has been following a tight monetary policy to fight the rising inflation which crossed 12 per cent. This led to high interest rate regime. With the subsequent unfolding of the global financial crisis, the liquidity situation aggravated.

Several central banks have already injected liquidity into their systems.

Rationale for imposing CRR