In a move to impart greater liquidity in the system, the Reserve Bank of India on Monday announced a 0.50% reduction in the cash reserve ratio (CRR) from 9% to 8.5%.
The reduction in the mandatory cash reserve requirements will come into effect from october11th and is expected to infuse Rs 20,000 crore in to the banking system.
Over the last few weeks the flow of credit by banks has nearly stopped and this ease in liquidity is likely to improve the credit flow. However, bankers are adopting a wait-and-watch policy till the mid-year review of the monetary policy on October 24th before taking any steps on the interest rate front.
"It is a clear signal that the step is to cool down the market. For the last one week, nobody was extending credit for sanctioned limits and also not considering new proposals. This step should bring down rates in the inter-bank market," said Andhra Bank Chairman and MD, RS Reddy.
IDBI Bank Chairman & Managing Director Yogesh Agarwal says: "The move will release some tension in the market. But I do not expect any immediate cuts in lending rates. We will be very selective in disbursing funds. The first priority is to provide adequate resources to productive sectors, especially infrastructure and oil and fertiliser (which is more like working capital). The cut is a temporary measure and tight monetary policy is likely to continue because inflation is well above RBI's comfort level."
Chanda Kochhar, Jt MD & CFO, ICICI Bank, said that this move will bring down the pressure on short-term borrowing rates but the long-term rates are still unpredictable as the central bank has described the measures as ‘ad-hoc'. "It's too early to expect an impact on lending and borrowing rates," she said.
AC Mahajan, CMD, Canara Bank said it is a positive step taken by the RBI at an opportune time. "We do not expect interest rates to move from here, especially for the retail segment. This will give banks an opportunity to offer discount on festive season," he said.
The credit crunch had forced banks to stop sub-PLR loans to corporates and also raised the short-term borrowing cost.
"It is not enough given the huge demand for corporate credit. The move to cut CRR is more of an indication by the central bank that it will inject more liquidity to the system, if required. RBI may take more steps gradually if liquidity situation does not improve," said Punjab National Bank Executive Director J M Garg.
On Saturday, before the central bank announced its measures, State Bank of India.
Chairman OP Bhatt said that rates have peaked, but were unlikely to come down soon because of tight liquidity.
This is the first time in the last five years that the central bank has reduced CRR. The last reduction was in June 2003 when CRR was lowered by 25 basis points to 2.50%.