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The Reserve Bank of India (RBI) cut the statutory liquidity ratio (SLR) requirement for banks by 50 basis points to 22%.
This is expected to make more resources available for financing a rise in credit demand when economic growth picks up.
Bankers and economists said this move indicated RBI trusted the government's plan to cut the fiscal deficit to 4.1% of gross domestic product (GDP) by the end of this financial year. And, for government borrowings to remain within limits.
Banks will need additional money to finance credit as economic growth gathers pace in the later part of year. So instead of blocking money for parking that into government bonds, banks could deploy money into credit.
ICRA managing director and chief executive Naresh Takkar said the SLR cut would increase the room for banks to provide additional credit to the productive sectors.
Indian Banks' Association (IBA) said RBI had acknowledged the government's effort to maintain fiscal discipline. But it has continued with a cautious tone on inflation and other uncertainties surrounding the global economy.
The central bank also brought down the ceiling on banks' total holdings of SLR securities in the Held to Maturity category, from 24.5% of their net demand and time liabilities to 24%.
K R Kamath, chairman and managing director of Punjab National Bank, said the two policy measures (SLR and HTM cut) would infuse growth-supportive liquidity in the system.
ANZ Bank said as long as the government followed a path to reduce the fiscal deficit, some reduction in the SLR should be possible and that should help set free funds to lend to the private sector.
An unintended benefit of the reduction in SLR is that the government is likely to be forced to take its commitment to bring down the fiscal deficit more seriously, it added.
The move to reduce the ceiling will not have any immediate impact on interest rates.
The demand for bulk deposits mighty come down. However, the easing of interest rates on term deposits is unlikely to happen in the near future, reflecting the effect of inflation, said P Sitaraman, chief financial officer at IDBI Bank.
