India Inc has welcomed the decision of the country's central bank to reduce the cash reserve ratio (CRR) by 150 basis points (bps) to 7.5 per cent instead of 50 bps to 8.5 per cent announced Oct 6, 2008 as it will inject $13.5 billion (Rs.600 billion) into the credit starved market.
The move by the central bank, Reserve Bank of India (RBI), was prompted by the acute shortage of liquidity in the Indian banking system which is having a severe adverse impact on the country's stock markets.
As a result of the liquidity crunch that banks were facing, the volume of borrowing in the inter-bank overnight segment of money markets had risen to over $6 billion (well over Rs.240 billion) in the last 10 days and the overnight call money rates had spiked to a peak of 23 per cent Thursday night.
“This would help boost industry sentiments," said Chandrajit Banerjee, director general of apex industry lobby Confederation of Indian Industries (CII).
"Pro-active action from the Indian regulators would ensure that India remains an island of stability even as the financial crisis unfolds in the rest of the world," he added.
The CII Director General went on to say that the RBI's decision to cancel the auction of bonds worth Rs.100 billion ($2.5 billion) scheduled for Friday was also welcome, as these auctions were putting further pressure on liquidity.
Another apex industry lobby, the Federation of Indian Chambers of Commerce and Industry (Ficci), also welcomed the decision Friday but said that the repo rate - the rate at which the central bank lends to commercial banks - should also be reduced.
“Reduction in interest rates is absolutely essential in order to give a push to investments and thus to employment and demand which has taken a severe beating in the recent past," a Ficci statement said, adding "Such confidence boosting measures are also important to bring the stock market to normal levels.”
Echoing the same view, Sajjan Jindal, president of another industry lobby, the Associated Chambers of Commerce and Industry of India (Assocham) said in a statement: “It was high time that the central bank should also consider reducing the benchmark lending rate to ensure adequate liquidity in the system."
If this is not done infrastructure projects in the country would be severely affected, he said.
“Though these measures were long overdue, the action should not be taken as a 'panic signal' as non performing assets (NPAs) of the banks are lower than 2 per cent,” Jindal said.
According to Tushar Poddar, Vice President - Asia Economics Research Team at Goldman Sachs: “This move will help ease some liquidity pressures in the money markets. We expect continued moves by the RBI to ease liquidity, and the probability of a rate cut at the October 24 policy meeting has increased.”
“Given the rise in risk aversion coupled with liquidity injection being one of the key priorities world over, we expect the RBI to continue to be active in injecting liquidity using a combination of further CRR cuts, unwinding of the Market Stabilisation Bonds (MSBs), reducing the SLR and via the repo window," said Rohini Malkani, economist with the City group.
The SLR or statutory liquidity ratio is another ready liquidity ratio that commercial banks are required to maintain as per central bank regulations.
“Looking ahead, we expect to see still further easing across the capital account (non-resident Indian deposits/external commercial borrowing norms, a relaxation of foreign institutional investor limits in debt markets/banks' overseas borrowing) as well as a reduction in CRR/SLR and unwinding of MSBs to ensure that adequate credit is available for the real economy,” Malkani added.