The RBI cut the CRR by 50bp to 8.5%, effective from 11 October, 2008 to release about Rs20,000 crore into the liquidity-starved money markets.
The RBI indicated that this was a temporary, adhoc measure directed towards liquidity management rather than a signal of softening monetary policy.
The apex bank also stated that active liquidity management would continue to receive priority in the hierarchy of policy objectives over the period ahead, while the overriding monetary policy objective would continue to be prevention of any further intensification of inflationary pressures and to firmly anchor inflation expectations.
As described earlier, a combination of factors resulted in liquidity in the system being tight through 2QFY2009.
The last fortnight was particularly difficult, with banks borrowing a substantial Rs50,000-90,000 crore from the RBI on a daily basis under the LAF facility. Call rates averaged 9.1% during the quarter and touched 15% in the last fortnight of the quarter.
Continued pullout of money by FIIs contributed to the tight liquidity, which was exacerbated by RBI’s 25bp CRR hike in the first quarter monetary policy that became effective from 30 August, 2008.
The present move would mitigate some of the liquidity crunch in call money markets, though liquidity conditions are likely to remain tight, especially in the face of continued capital outflows.
Moreover, a conclusive reversal in the interest rate cycle is likely at least two quarters away, by when both inflation and M3 growth would be approaching RBI’s comfort zone and it would be too soon to expect major monetary softening by the RBI until then.
Such tight liquidity and high interest rates at the short-end worsen the operating environment for banks that rely more on short-term funds as against low-cost current and savings account and mainly include small and mid-sized banks; the present move would especially provide some relief to them.
Large banks with high CASA ratios such as HDFC Bank, SBI, Punjab National Bank and Axis Bank, continue to be more favourably placed in the current environment.