RBI cuts CRR by 0.75%

With this move,the Reserve Bank of India (RBI) would be injecting around Rs 80,000 crore into the economy in less than 40 days. The central bank in January had reduced CRR by 0.5 percentage points,releasing Rs 32,000 crore liquidity.

These measures,according to the central bank,are aimed at addressing “the liquidity deficit (which) is expected to increase significantly during the second week of March on account of to advance tax outflows and the usual front-loading of cash balances by banks with the Reserve Bank”.

The last date for advance tax payment in March 15 and is estimated to drain out Rs 60,000 crore from the system.

Commenting on the impact of RBI’s decision on interest rate,Bank of Baroda Chairman and Managing Director M D Mallya said,”I do not expect any bank to cut either the lending or the deposit rate immediately.”

Appreciating RBI’s decision to cut CRR ahead of its scheduled policy review on March 15,industry chamber CII expressed the hope that central bank would also reduce interest rates to boost investment and growth.

ICICI Bank Managing Director Chanda Kochhar said “this is expected to bring down the high level of overnight borrowings by nanks from RBI. This would also ensure continued smooth flow of credit in the corporate and retail sector”.

Mallya said,”We were expecting a cut of 50 basis points,this is very welcome as we are going through a difficult phase of liquidity being under pressure.”

It is to be noted that the tight liquidity situation has compelled banks to draw heavily from the central bank. The average borrowing from the RBI was over Rs 1 lakh crore in the past few days.

The net average borrowing under the Reserve Bank’s liquidity adjustment facility (LAF) rose from an average of Rs 1.29 lakh crore in January to Rs 1.40 lakh crore in February,the RBI said in a statement.

Net injection of liquidity through LAF rose to a peak of Rs 1.91 lakh crore on March 1,2012,though subsequently it declined to Rs 1.27 lakh crore on March 7,2012,it added.

“Thus,the overall deficit in the system persists above the comfort level of the Reserve Bank,” it said.

Accordingly,it has been decided to inject permanent primary liquidity into the system by reducing the CRR so as to ensure smooth flow of credit to productive sectors of the economy,it said.

As part of liquidity easing measures,the RBI was also conducting open market operations (OMOs) and has umped in primary liquidity of over Rs 1.24 lakh this financial year so far. Of this,Rs 52,800 crore was injected after the third quarter review in January,it said.

In its latest OMO auction held today,the RBI injected Rs 11,554.152 crore into the system.