Mumbai: Taking swift action to inject about Rs60,000 crore into the cash-strapped system, the Reserve Bank on Friday announced additional one per cent cut in mandatory requirements for banks to keep cash with the central bank over and above 0.50% reduction announced earlier.
With this, a total 1.50% cut in Cash Reserve Ratio (CRR) to 7.50 per cent will come into effect from tomorrow.
“Accordingly, on a review of the evolving liquidity situation in the context of global and domestic developments it has been decided to reduce CRR by 150 basis points to 7.50% with effect from the fortnight beginning 11 October instead of 50 basis points reduction announced on 6 October,” RBI said in a statement here.
Both the measures - a 1% and a 0.50% cuts in CRR - came ahead of RBI’s mid-term review of monetary policy slated for 24 October.
In the context of the abrupt changes in the international financial environment, it is important to note that the economic fundamentals of the Indian economy are strong and resilient and that India’s financial system is sound, well-capitalist and well-regulated,” RBI said.
The central bank said money in forex markets in India have been operating in a relatively orderly manner.
“The current domestic market conditions are essentially a reflection of the adverse developments and extreme uncertainty in international financial markets,” the statement said.
The Reserve Bank also said that it would ensure price stability along with the growth process.
“The Reserve Bank is monitoring developments closely and continuously and would respond swiftly and even preemptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy,” it said.
Finance Minister P Chidambaram had already assured the nation that liquidity will be injected into the system if the need arises.
Besides RBI’s measures, certain other steps like lifting of curbs on Participatory Notes by market regulator Sebi and relaxation in overseas borrowing norms by the government have already been taken to inject money flow into the system.
Welcoming the RBI decision to reduce the CRR by 150 basis point, Assocham president Sajjan Jindal said “ it was high time that the Central Bank should consider reducing the benchmark lending rate to ensure adequate liquidity in the system. He said though these measures were long over due, the action should not be taken as a ‘panic signal’ as non performing assets (NPAs) of the banks are even lower than 2%.
The industry chamber’s membership has requested for a removal of ceiling of interest rate of external commercial borrowings.
With inputs from livemint.com