RBI cuts CRR by 75 bps to ease liquidity conditions

The Reserve Bank of India on Friday cut a key rate to free more money for commercial banks to lend and to ease the liquidity situation.

The central bank slashed the cash reserve ratio - the portion of deposits banks are required to keep with the central bank - by 0.75 percentage points to 4.75 per cent from 5.5 per cent.

This move would infuse Rs 48,000 crore into the economy. The reduction in cash reserve ratio (CRR) comes into effect from Saturday.

The measure is aimed at reducing "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 frontloading of cash balances by banks with the Reserve Bank," the central said in a statement.

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

RBI had on January 24 reduced CRR by 0.5 percentage points, injecting Rs 32,000 crore into the cash-strapped system.

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.

RBI has announced reduction in CRR a week ahead of its scheduled mid-quarterly review of monetary policy on March 15.

Reacting to the RBI's decision to cut CRR, bankers said, it will not immediately result in reduction in interest rates.

"Change in the deposit rates will be done on the basis of demand for money... I do not think there will be any immediate reaction on this neither on the deposit nor on the advances front," Bank of Baroda Chairman and Managing Director M D Mallya said.

According to Canara Bank Chairman and Managing Director S Raman, this infusion would bring in around Rs 2,500 crore to the bank's kitty. "We will have to look into various things before deciding on the rate cut," Raman said.