The Reserve Bank of India (RBI) slashed three key rates to free up cash in the banking system and ease the credit.
The cuts are expected to infuse Rs 85,000 crore into the system and could even make home and consumer loans cheaper.
The cash reserve ratio (CRR) — the percentage of deposits banks have to keep with the RBI — was cut by 1 per cent to 5.5 per cent.
The repo rate, at which the RBI lends to banks, was cut by 0.5 per cent to 7.5 per cent. The statutory liquid ratio, the percentage of deposits banks have to invest in government securities, was cut by 1 per cent to 24 per cent.
The cuts are great news for India Inc as they could help meet industry’s credit demands. The CRR cut would be made effective in two tranches of 0.5 per cent, from October 25 and November 8 respectively.
The RBI had injected Rs 1.85 lakh crore into the system last month. On Friday, the government followed it up with a slew of fiscal measures to help industry.
MD Mallya, chairman and managing director of Bank of Baroda, said the RBI announcement was expected. “Inflationary pressure has eased; this will enhance liquidity,” he said.
Saugata Bhattarcharya, vice-president of Axis Bank, said the move would “provide more long-lasting comfort”.
“Though the liquidity situation has improved over the last month, there was an emerging threat to it and the credit market remained frozen,” he pointed out.