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RBI moves to ease cash crunch, cuts CRR 75 bps

Move to unlock Rs 48,000 crore, comes as a pleasant surprise for market

BS Reporter  |  Mumbai 

In a pleasant surprise to the market, the Reserve Bank of India (RBI) on Friday reduced the cash reserve ratio (CRR) — the portion of deposits have to keep with the central bank — by 75 basis points. This will infuse Rs 48,000-crore liquidity into the system.

The cut, which comes less than a week ahead of the mid-quarter review of monetary policy, scheduled on Thursday, is aimed at avoiding a cash crunch due to the advance corporation tax outflow scheduled later next week. That could have caused short-term rates to shoot up. Market participants were expecting a 50-basis-point cut in CRR.

While industry welcomed the move, Confederation of Indian Industry Director-General Chandrajit Banerjee said what was needed was a cut in interest rates. “We expect a 25-basis-point cut in the repo rate in Thursday’s credit policy,” Banerjee said.


* Average liquidity deficit since January was more than double RBI’s comfort level

* Advance tax outflow in mid-March would put additional pressure of Rs 50,000 crore

* Three-month CD rates above 11%


* Yields on govt bonds expected to go down 6-8 bps

* Short-term rates to ease at least 25 bps

* Banks’ margin to improve 8-10 bps


* The jury is out on this. Some say this will happen, as inflation will moderate further in April and the slowing economy needs momentum, while others see little hope due to high crude oil prices and uncertainty on the fiscal consolidation front

The real estate sector expressed the hope that the central bank would cut policy rates by 50 basis points on Thursday.

Anjan Barua, deputy managing director (global markets), State Bank of India, said the CRR cut would release about Rs 7,500 crore to SBI. “It will ease the money market rates next week by 10-15 basis points, but CRR cut does not mean much as far as reduction in the cost of funds is concerned. It is minimal, and, hence, does not so translate into headroom for cutting lending rates,” he said.

Others said the CRR cut move would immediately ease the short-term rates, which rose sharply in the last week or so. “We are pleasantly surprised with on Friday’s RBI action. The move is aimed at easing liquidity condition. Following the CRR cut, we expect rates on certificates of deposits and bulk deposits to come down at least 25 bps, if not more. The yield on the 10-year benchmark government bond is also expected to come down by six-eight bps,” Canara Bank Chairman and Managing Director S Raman said.

The rate on three-month certificates of deposit has risen 75-100 bps to over 11 per cent in the last one week. Yields on government bonds are also expected to come down due to liquidity infusion when the markets open on Monday. The 75-basis-point reduction in CRR to 4.75 per cent will release Rs 7,500 crore for State Bank of India. For like Bank of Baroda and Canara Bank, the relief will be Rs 2,000 crore to Rs 2,250 crore.

Explaining the reason for on Friday’s action, RBI said: “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 with RBI. So, the overall deficit in the system persists above the comfort level.” The central bank said it wanted to ensure smooth flow of credit to the productive sectors of the economy.

The fourth tranche of the advance tax, which is generally higher than earlier occasions, is estimated to drain liquidity to the tune of around Rs 50,000 crore. Though a section of market participants sees on Friday’s move as being purely liquidity-driven and not linked to RBI’s policy stance, some bankers said the central bank would only act on the rate front if it felt inflation was under control. The government would announce its February inflation numbers on Wednesday — a day before the policy. Market participants see inflation cooling further in February, after declining to 6.55 per cent in January — within the central bank’s March-end inflation projection of seven per cent.

“The CRR cut is a proactive step by RBI to inject permanent liquidity into the system. This is expected to cool the high level of overnight borrowings by banks from RBI. This would also ensure a continued smooth flow of credit in the corporate and retail sectors,” ICICI Bank MD and CEO Chanda Kochhar said.

“If RBI chooses to cut the repo rate by at least 25 bps in the March policy, banks are likely to respond with reduction in lending rates from April,” said the chairman of a large public sector bank. Economists said they did not expect a rate cut to happen in March, as oil prices were still ruling high and a reversal of the policy stance would only happen from April. “We now expect a status quo on both CRR and the repo rate at the March 15 policy meeting. Today’s CRR cut does not automatically imply a policy rate cut. This is because oil prices are already high and the Budget is a day after RBI’s policy review on March 16,” said Nomura Financial Advisory and Securities Economist Sonal Verma.

First Published: Sat, March 10 2012. 00:27 IST