Reserve Bank of India Cuts Reserve Ratio 75bps to 4.75%

The Reserve Bank of India [RBI] cut the cash reserve ratio [CRR] of scheduled banks by 75 basis points to 4.75% from 5.50% previously.  The RBI said the move will inject about 480 billion of primary liquidity into the banking system, and said: "In order to mitigate tight liquidity conditions, the cash reserve ratio was reduced by 50 basis points in the Third Quarter Review (TQR) of January 2012, injecting primary liquidity of `315 billion into the banking system. The Reserve Bank also continued with the open market operations (OMOs), injecting primary liquidity of over `1,245 billion this financial year so far, of which `528 billion was injected after the TQR."

The Bank further noted: "Further, the liquidity deficit is expected to increase significantly during the second week of March due to advance tax outflows and the usual frontloading of cash balances by banks with the Reserve Bank. Thus, the overall deficit in the system persists above the comfort level of the Reserve Bank. 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."

Aside from the CRR, the Reserve Bank of India last increased the repo rate by 25 basis points at its October and September meetings, after hiking a surprise 50 basis points at its previous meeting to 8.00%, having increased 25 basis points in June, and 50 basis points during the May meeting.  The RBI still meets next week on the 15th of March to review interest rates and will provide its assessment of the macroeconomic situation.

www.CentralBankNews.info