The Reserve Bank's decision to reduce the CRR by half a percentage point will ensure the flow of funds to various sectors of the economy and pave the way for lowering interest rates, say analysts.
"CRR cut is a signal that the RBI will further soften its stance going forward. Its policy stance will now focus more on growth than inflation. So if GDP comes down drastically in the near future, it will go for a rate cut in March itself, or else, it will ease interest rates only from April, 2012," Daiwa AMC Head (Fixed Income) Killol Pandya said.
"Lowering of CRR is a welcome step for bringing the much-needed cash to the market. The RBI has said it will continue with open market operations [OMOs], which will bring another Rs 40,000 crore into the system, apart from the Rs 32,000 crore that will be infused via CRR cut," he added.
However, while ratings agency ICRA MD & CEO Naresh Takkar shared the view that the RBI will focus on growth in future policy decisions, he felt the central bank will refrain from further open market operations.
"Given the RBI's concerns that rupee depreciation and adjustment in prices of fuel items on account of suppressed inflation may stoke inflationary pressures, we expect the central bank to refrain from announcing further open market purchases of government securities in the near-term and keep the repo rate unchanged in Q4, 2011-12, and embark on monetary easing in April, 2012," he said.
"The 50 basis points cut in CRR to 5.5% has been instituted by the RBI to address the systemic liquidity deficit that remains above its stated comfort levels and to ensure the flow of funds to various sectors of the economy," he added.
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The RBI today announced a 0.5 percentage points cut in the cash reserve ratio to 5.5% to inject Rs 32,000 crore into the system. The RBI also lowered its growth projection for 2011-12 to 7% from 7.6% in view of the global slowdown and domestic policy constraints.
While the RBI "shifted" the policy stance from inflation to growth, which faces downside risks, borrowers reeling under high interest rates can draw solace from the announcement that "future rate actions will be toward lowering them".
The RBI has increased key policy rates 13 times since March, 2010, before taking a pause in its mid-quarterly review last month.
Lauding the RBI on the CRR cut, RPG Enterprises Chairman Harsh Goenka welcomed the move and said it was "presumably the first step toward reduction of interest rates".