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RBI cuts CRR 100 bps, releases Rs 40,000 crore

The Reserve Bank of India today reduced the cash reserve ratio (CRR), or the proportion of deposits banks set aside, by another 100 basis points to release a further Rs 40,000 crore into the system.

This is the third time the central bank has cut the CRR in two weeks, bringing the combined cut to 2.5 percentage points, releasing a total of Rs 1,00,000 crore into the cash-starved banking sector to allow it to resume normal lending operations.

In a departure from the past, RBI said the latest CRR reduction will be applicable retrospectively from October 11 (Saturday). With this cut, the CRR will be 6.5 per cent against 9 per cent until Friday. This is the steepest-ever CRR cut. In July 1974, CRR was slashed 2 percentage points to 5 per cent.

Further, to help mutual funds, as a temporary measure, RBI has allowed banks to avail of additional liquidity support of up to 0.5 per cent of their Net Demand and Time Liabilities (NDTL). This is in addition to the ad-hoc reduction in the statutory liquidity ratio (SLR) to 24 per cent of NDTL. The prescribed SLR floor, or the proportion of funds to be invested in designated government securities, is 25 per cent but a one percentage point reduction was made to enable banks to draw resources.

To attract foreign currency from non-residents Indians, the central bank has raised the interest rates ceiling on deposits by 50 basis points.

Banks have also been given more headroom to raise funds from their overseas branches. Now, they can borrow up to 50 per cent of their unimpaired tier-I capital from their overseas branches and correspondent banks or $10 million, whichever is higher. The earlier ceiling was 25 per cent.

The central bank also decided to resume special market operations for buying oil bonds from petroleum marketing companies once the government issues them to pay its share of the subsidy bill.

While bankers are sceptical of whether the increase in the NRI deposit rate ceiling would help attract more funds into India in the immediate future, they said that the move to raise the CRR will help cool money markets. Call rates, which touched 23 per cent on Friday, have eased to around 10 per cent .

"Liquidity will improve substantially but it will not solve the problem completely. It will ease the concerns over resources for the short-term," said IDBI Bank Chairman & Managing Director Yogesh Agarwal.

While suggesting that the liquidity requirement in the economy needed to be calculated keeping in the flows from external commercial borrowings, foreign currency convertible bonds and the NRI deposits, ICICI Bank Joint Managing Director Chanda Kochhar said, "Rupee liquidity is required to meet project financing and working capital needs. It is timely because the current situation required measures and it should bring about a lot of stability."

Despite today's measures, bankers are not ruling out further action in the monetary policy review scheduled for October 24.

"The system perhaps needs more liquidity. Another CRR and a repo rate cut can be expected in the forthcoming RBI policy," said Partho Mukherjee, senior vice-president (forex & treasury) at Axis Bank. The repo rate is the rate at which the RBI lends to banks against government securities.

Source: Business Standard

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