RBI may slash CRR by 25 basis points soon | business | Hindustan Times
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RBI may slash CRR by 25 basis points soon

With the last date for payment of advance tax drawing closer, pressure is mounting on the Reserve Bank to cut Cash Reserve Ratio (CRR) by at least 0.25% points to improve liquidity in the system.

business Updated: Dec 04, 2011 11:23 IST

With the last date for payment of advance tax drawing closer, pressure is mounting on the Reserve Bank to cut Cash Reserve Ratio (CRR) by at least 0.25% points to improve liquidity in the system.

Bankers and analysts believe the RBI intervention may come anytime during the week as the payment of advance tax by companies will be due on December 15. This will result in substantial amount of money being sucked out from the market.

Such a move to lower CRR, which is the portion of deposit that banks are compulsorily required to keep with the central bank, will result in release of about Rs 15,000 crore into the system.

"We expect 25-50 basis point cut in the CRR at any time. It could happen during this week," head of a leading public sector bank said.

The CRR has been left unchanged at 6% since May 2010.

However, the policy rates have been raised 11 times during the same period. In October, the central bank raised the repo rate by 25 basis points to 8.50% and the reverse repo rate moved up by a similar percentage to 7.50%.

Repo is the short-term rate at which the Reserve Bank of India (RBI) lends to banks, while reverse repo is the rate at which it gets funds from banks.

According to senior official of another public sector bank, the liquidity infusion from the RBI looks very likely.

He said CRR cut may happen either during the week or on December 16 when the RBI will release its mid-quarterly review of the monetary policy.

Analysts also feel there would be liquidity easing from the central bank in a gradual manner.

"We expect the Reserve Bank of India to continue to ease liquidity, first through open market operations, and then by cutting the reserve requirements of banks," Goldman Sachs said in a report.

"Given this backdrop of growth slowing and inflation peaking off, we are relieved that the RBI has finally begun Open Market Operations to cut the money market liquidity deficit and reduce undue pressure on interest rates," said Bank of America-Merrill Lynch India Economist Indranil Sen Gupta said.