RBI slashes CRR after five years; interest rates may ease

RBI slashes CRR after five years; interest rates may ease

Mumbai: Moving to ease pressure on interest rates, the Reserve Bank of India on Monday cut by half-a-percent 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% from 11 October and the move would release about Rs20,000 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% 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 Hedge 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.