RBI may slash CRR by 25 basis points soon

RBI may slash CRR by 25 basis points soon

New Delhi: With the last date for payment of advance tax drawing closer, pressure is mounting on the Reserve Bank of India (RBI) to cut Cash Reserve Ratio (CRR) by at least 0.25 percentage points to improve liquidity in the system.

Such a move to lower CRR, which is the portion of deposit that banks are compulsorily required to keep with the central bank, will result in release of about Rs15,000 crore into the system.

“We expect 25-50 basis point cut in the CRR at any time. It could happen during this week," head of a leading public sector bank said.

The CRR has been left unchanged at 6% since May 2010.

However, the policy rates have been raised 11 times during the same period. In October, the central bank raised the repo rate by 25 basis points to 8.50% and the reverse repo rate moved up by a similar percentage to 7.50%.

Repo is the short-term rate at which the Reserve Bank of India (RBI) lends to banks, while reverse repo is the rate at which it gets funds from banks.

According to senior official of another public sector bank, the liquidity infusion from the RBI looks very likely.

He said CRR cut may happen either during the week or on 16 December when the RBI will release its mid-quarterly review of the monetary policy.

Analysts also feel there would be liquidity easing from the central bank in a gradual manner.

“We expect the Reserve Bank of India to continue to ease liquidity, first through open market operations, and then by cutting the reserve requirements of banks," Goldman Sachs said in a report.

“Given this backdrop of growth slowing and inflation peaking off, we are relieved that the RBI has finally begun Open Market Operations to cut the money market liquidity deficit and reduce undue pressure on interest rates," said Bank of America-Merrill Lynch India Economist Indranil Sen Gupta said.