RBI slashes CRR by 0.50%

MUMBAI, March 23: Relaxing the tight money measures announced in January to normalise the foreign exchange market, the Reserve Bank of India...

MUMBAI, March 23: Relaxing the tight money measures announced in January to normalise the foreign exchange market, the Reserve Bank of India on Monday announced a two-phase 50 basis points (half percentage point) cut in cash reserve ratio (CRR) of banks’ net demand and time liabilities. The cut in CRR (money to be retained by banks with the RBI) to 10 per cent follows the reduction in the fixed repo (repurchase agreements of government securities) rate by 100 basis points to eight per cent and bank rate by 50 basis points to 10.5 per cent last week.

The first phase of 25 basis points reduction in CRR will be effective on March 28. The second phase of reduction will take place in the next fiscal — on April 11. The half percentage point cut in CRR will infuse Rs 2,600 crore into the banking system, an RBI directive issued to scheduled commercial banks on Monday said. Bankers ruled out the possibility of paring the prime lending rate (PLR) or deposit rates immediately. “The first phase of CRR cut will takeeffect on March 28. There is no question of paring the PLR or even deposit rates in the current fiscal which comes to an end on March 31,” said a senior banker.

The cut in CRR may lead to a liquidity overhang in the system triggering a further dip in the yield to maturity (YTM) of government securities. "The state run banks may reap of harvest of over Rs 5000 crore if the YTM on 10-year dated paper dips below 12 per cent," said another banker.

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The 50 basis points two-phase CRR cut, along with the cut in bank rate and repo rate, will pave the path for smooth sailing of the government borrowing programme in the next fiscal.

"The increased liquidity will pave the way for the government’s borrowing programme in the next fiscal. With the cut in CRR the government’s cost of borrowing will come down substantially," said P H Ravikumar, senior vice president of ICICI Bank. On Tuesday, the RBI cut the repo rate by 100 basis points to 8 per cent. The bank rate cut is yet another roll back of the January 16measures when the apex bank unleashed a rupee-support package to stall speculator’s attack on the Indian rupee.

The RBI on January 16 hiked the CRR by 50 basis points to 10.5 per cent, reduced export refinance limits to 50 per cent from 100 per cent and general refinance limits to 0.25 per cent from one per cent besides hiking bank rate and fixed repo rates. Bankers expect all these measures to be rolled backed in the next few weeks.

The RBI’s decision to roll back the tight money measures is clearly a signal for reducing interest rates. The reversal in policy stance so soon after the elections seems to indicate that the RBI had decided to hold the rupee stable at all costs till the elections. Now that a government is in place, the expectation could be that the reduction in uncertainty will help the rupee. The rupee has, meanwhile, remained steady against the dollar in the last fortnight, thereby allowing the RBI to exercise the rollback option.

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