Cuts CRR by additional 100 bps, cancels bond auctions; yet call rates near 20%.
Factoring in the efforts to control the global financial crisis, the Reserve Bank of India (RBI) today announced an additional 100 basis point reduction in the cash reserve ratio (CRR), or the proportion of deposits that banks set aside, to inject more liquidity into the system.
On Monday, the RBI had announced a 50 basis point cut in CRR. The CRR will thus fall to 7.5 per cent of the net demand and time liabilities, against 9 per cent at present, from the fortnight starting tomorrow. With today’s move, RBI said, Rs 60,000 crore would be injected into the system, instead of Rs 20,000 crore, from the 50 basis point cut announced earlier.
The move came as call rates touched a 19-month high of 23 per cent. Citing tight liquidity conditions, RBI also called off government bond auctions for Rs 10,000 crore that were scheduled for today.
While announcing the earlier reduction, RBI had termed it ad-hoc, but this time there was no such mention.
RBI had not cut CRR since June 2003, when it was lowered 25 basis points to 4.50 per cent. The 150 basis point reduction is the steepest since 2001.
“This measure was taken with a view to injecting liquidity into domestic financial markets so as to alleviate the pressures brought on by the deterioration in the global financial environment. In the ensuing days, the global situation has worsened. International stock markets and money markets have been adversely affected in a significant manner. Central banks across the world have responded to these extraordinary developments by synchronised policy actions including measures for liquidity infusion,” RBI said in a statement today.
In a coordinated move on Wednesday, the US Federal Reserve, the European Central Bank, Bank of England and the Chinese central bank had lowered interest rates in the wake of the global financial turmoil.
In India, the call rates have stayed in the double-digit zone. Rates had touched a high of 17 per cent following the payment of advance tax by companies. According to data on the Clearing Corporation of India website, call rates touched a high of 23 per cent today. While it fell to a low of 9 per cent later, the weighted average for the day was 19.84 per cent as banks borrowed to meet regulatory requirements.
Banks also borrowed heavily from RBI through the repo window with net borrowings at Rs 91,500 crore, compared to around Rs 80,000 crore on Wednesday. “This should have a cooling effect on the market and ease liquidity,” ICICI Bank Joint Managing Director Chanda Kochhar said.
M V Nair, Chairman and Managing Director, Union Bank of India, said, “It was a much-needed help that will ease the pressure as the market borrowings of banks was in excess of Rs 1,00,000 crore. Even after the release of Rs 60,000 crore, there will be some gap. But this will be filled by reimbursement of the farm debt relief and government spending.”
Bank of Maharashtra Chairman & Managing Director Allen CA Pereira added that the liquidity condition is tight and is affecting the cost of funds. “For the time being, it is sufficient… Releasing funds into the systems is necessary for lending to productive sectors, especially and when the credit demand grows in the busy season (October-March),” he said.
IDBI Gilts Managing Director N S Venkatesh said the reduction appeared sufficient to improve the availability of money and cool the call rates.
