A decision to cut the Cash Reserve Ratio (CRR) by 75 basis points will reduce pressure on liquidity ahead of payment of advances tax by March 15. The short term rates may soften by about 25 basis points next week.
Bank officials and treasury executives said the RBI decision would inject Rs 48,000 crore into the banking system. This would help ease the pressure on liquidity which was pushing up rates on short term money markets.
The revised CRR will be 4.75% from March 10, 2011. The central bank had cut CRR by 50 basis points in the third quarter review in January.
The rates on 3-6 months certificates and commercial paper, money market instruments, have crossed 11% mark in recent days.
PR Karanth, general manager (treasury), Corporation Bank, said: "It is timely step ahead of tax payments next week. At least 25 basis points cut in short term money rates are expected next week."
NS Venkatesh, chief general manager (treasury), IDBI Bank, said: "The CRR cut will take off some of the pressure and release about Rs 1,800 crore for his bank. The RBI may further reduce CRR by another 50 basis points in April."
The RBI in a statement said the liquidity deficit has remained large on account of both structural and frictional factors. Further, 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 banks.
MD Mallya, chairman and managing director, Bank of Baroda, said: "There may be overall moderation in interest rate but do not see any immediate cut in term deposit and lending rates."
