RBI cuts CRR by 0.5%; leaves other rates unchanged

The Reserve Bank of India today announced a cut in the cash reserve ratio (CRR) by 50 basis points (0.5 per cent) to 5.5 per cent; but left other key policy rates unchanged in its third quarter (October-December) monetary review today.

The new CRR rate – the funds commercial banks have to park with the central bank - will be effective from 28 January 2012. According to RBI governor D Subbarao, the cut is expected to infuse Rs32,000 crore into the system, easing the tight liquidity situation.

The RBI has hiked the policy rates 13 times since March 2010. However, the reverse repo and repo rates were left unchanaged at 7.50 per cent and 8.50 per cent respectively in the last two credit policies. Since 2009, this is the first time the RBI has reduced the CRR.

"In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance," Subbarao said in a statement.

"Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rates. However, the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time."

Banks are seen borrowing around Rs1.30-Rs1.40 lakh crore on a daily average from the RBI's repo window at 8.50 per cent. According to analysts, the borrowing level is significantly higher than the average level of around Rs70,000-80,000 crore. Through its repo counter, the RBI lends to banks to meet their liquidity requirements.