RBI floods Rs 48,000-cr into system with 75 bps CRR cut

The Reserve Bank of India on Friday cut the cash reserve ratio by a ‘surprisingly aggressive' 75 basis points.

The move to cut the amount of cash that banks need to park with the RBI (or CRR) from 5.50 per cent to 4.75 per cent of deposits is aimed at easing the persistent liquidity crunch being faced by banks.

The latest round of CRR cut comes just five days ahead of the mid-quarter review of the Monetary Policy.

The RBI action, which came after market hours, will inject around Rs 48,000 crore of primary liquidity into the banking system.

In its third quarter review of monetary policy in late January, the central bank had reduced the CRR from 6 per cent to 5.50 per cent of deposits. However, this did not ease the liquidity pressure.

Liquidity crunch

The liquidity deficit is expected to increase significantly in mid-March due to advance tax outflows and the usual frontloading of cash balances by banks with the RBI.

Thus, the overall deficit in the system persists above the comfort level of the RBI, said a central bank statement.

“We were expecting a 50 basis points cut in Cash Reserve Ratio. But this 75 basis points cut is a pleasant surprise. It is a good initiative on the part of RBI. There was a lot of pressure on liquidity and with the impending advance tax outflow the liquidity situation would have become worse,” said Mr M.D. Mallya, Chairman, Indian Banks' Association and Chairman and Managing Director, Bank of Baroda.

The liquidity deficit in the banking system is underscored by the fact that net injection of liquidity by RBI rose to a peak of Rs 1,91,700 crore on March 1, but it declined to Rs 79,965 crore on March 9.

Pre-emptive step

Bankers say the reduction in CRR, which is effective from the fortnight beginning March 10, is a pre-emptive step.

Otherwise the credit crunch would have got accentuated in the coming few days.

Advances tax payments by corporates are estimated at Rs 50,000-Rs 60,000 crore, towards the middle of this month.

In a bind

This coupled with bulk deposit redemptions and loan demand in the last fortnight of the financial year would put banks in a bind, explained a banker.

Despite the liquidity injection, banks are unlikely to tinker with deposit and lending rates. Any cut in these rates will happen only if the RBI reduces the repo rate in the Monetary Policy for 2012-13, which is scheduled to be announced on April 17.

The mid-quarter review on March 15 may outline the RBI's intent to cut interest rates in the monetary policy for 2012-13, subject to the Centre coming out with a clear roadmap on fiscal consolidation, said Mr N.S. Venkatesh, CGM (Treasury), IDBI Bank.

The Certificate of Deposit rates, which touched 11.25 per cent for three months, are expected to soften by up to 100 basis points. This will bring down the cost of borrowing for banks.