Yet another move by the Reserve Bank of India to ease cash squeeze, support growth and overcome the global financial crisis. RBI has again cut its short-term lending rate (repo rate) and cash reserve ratio (CRR) by 50 basis points and 100 basis points respectively. The CRR of scheduled banks is reduced from 6.5% to 5.5% while the repo rate under the Liquidity Adjustment Facility (LAF) has come down to 7.5% from 8%. This seems a surprise move that came just a week later from the policy review on October 24th, where these rates were left untouched. Vikas Agarwal, Strategist at JP Morgan, said: "These actions were necessary (and had) to be taken on the liquidity front. And with call rates above 20 percent the situation was getting worse." Call rates had touched to a high of 21% on Friday and banks rushed to borrow from RBI through its LAF window. Following this situation, RBI declared an unexpected cut in its repo rate on Saturday. The cut in the repo will come into effect from November 3rd where as the cut in CRR will take effect in two steps. The first cut will be effective form the fortnight beginning October 25th and second from November 8th. These cuts are likely to infuse an additional Rs 85,000 crore into the banking system. RBI has also reduced the portion that banks need to invest in government bonds or statutory liquidity ratio (SLR) by 100 basis points to 24%. This change will come into effect from November 8th. "The global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability," said the Central Bank. RBI seems to give a clear signal to the banks to reduce their lending as well as deposit rates. "The Reserve Bank has sent an explicit signal to banks to lower their lending rates and that economic growth and financial stability have taken precedence over inflation control," said D K Joshi, Crisil Director and Principal Economist. These measures announced by RBI focus towards the growth objective along with following a low interest regime. |
