Terming the RBI action to infuse liqidity "appropriate", Prime Minister's economic advisory panel chief C Rangarajan on Sunday said policy rate cuts by the central bank would depend on inflation movement.
"I think that (policy rate cut) will depend very much upon how inflation behaves. But this present decision of cutting CRR by 75 basis points is an important step towards easing of the monetary policy," he told PTI, when asked about RBI's possible course of action in its mid-quarterly review this week on March 15.
The apex bank in a surprise move slashed CRR from 5.5% to 4.75% on Saturday, a step that will infuse Rs 48,000 crore into the economy.
"I think there is tightness in the market. This tightness may even be stronger towards the middle of month when tax payments are also due. Therefore, given all these factors, I think this action (slashing CRR) of RBI was appropriate," Rangarajan said.
The RBI had said that the measure was aimed at reducing the liquidity deficit (which) is expected to increase significantly during the second week of March on account of advance tax outflows and the usual frontloading of cash balances by banks with the Reserve Bank.
The last date for advance tax payments is March 15 and is estimated to drain out Rs 60,000 crore from the system.
RBI had last reduced CRR by 0.5 percentage point on January 24 thereby injecting Rs 32,000 crore into the cash-strapped system.
With the latest decision, the RBI would be injecting around Rs 80,000 crore into the economy in less than 40 days.