RBI needs to slash CRR, repo rate further: IEG

The RBI should further cut Cash Reserve Ratio, the mandatory deposit that banks are required to keep with it, to stimulate the economy and infuse liquidity in the money market, suggests a new report.     

"There is a need for further cut in both CRR and repo rate to stimulate the economy," the Institute of Economic Growth said in its monthly report.     

The RBI had earlier this month cut the Cash Reserve Ratio (CRR) by 250 basis points for the first time in almost five years to inject liquidity into the cash-starved banking system.

Besides, it also slashed rate at which it lends short-term funds (repo) by 100 basis points to 8 per cent.     

The measures taken by RBI infused Rs 1,85,000 cr in the system.

However, the liquidity situation has once again tightened during this week.     

Interest rates are not falling in line with easing inflation that has been declining for five weeks in a row.     

"There is a need to reduce the overall interest rate structure as it would hamper growth more than it offsets inflation in the medium term.

But this reduction is insufficient to prop-up economic activity and need further cut in repo rate," the report said.    

"Although the cut in CRR is to ease the liquidity constraints in the short term money market, the cut in repo rate should be seen as a medium term policy to stabilise growth."