The Reserve Bank of India Deputy Governor Rakesh Mohan on Thursday said the cash tightness in the banking system was temporary
Foreign institutional investors pumped in nearly $167.35 million (Rs 899.83 crore) into the local stock markets on Tuesday, according to the BSE provisional data.
India Inc's reactions to the RBI rate cut.
The new effective repo rate for the third quarter is now fixed at 7.25 per cent while CRR rate has revised to 4 per cent.
In its Third Quarter Review of Monetary Policy 2012-13, the Reserve Bank of India has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect.
At a time when headline inflation has been moderating, most were expecting the central bank to take a firmer stance on growth.
At present, CRR, the portion of deposits which commercial banks keep with the central bank, stands at 6 per cent.
Some see CRR cut as tight liquidity continues.
Explaining the rationale behind the regulatory mandate, the deputy governor, who looks after banking supervision, apart from a host of other departments at the central bank, said the CRR is charged on banks because only they can create money.
The central bank raised statutory liquidity ratio, the portion of deposits that banks are required to keep in government securities, by 100 basis points to 25 per cent. Other key rates were unchanged.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent and the marginal standing facility (MSF) rate at 9.5 per cent.
Five of the six external members had suggested that the central bank should reduce the policy rate.
With credit demand picking up and liquidity crunch yet to ease, bankers are expecting a cut in key policy ratio - Cash Reserve Ratio (CRR) - by one per cent in the mid-term monetary policy review by RBI, a top bank official said.
Reserve Bank's recent policy stance has earned for it praise as well as brickbats.
Bank lending has seen a significant fall. RBI needs to bring liquidity into the system immediately.
After all, India is the only one among the BRIC nations (Brazil, Russia, India and China) where lending rates are still ruling at their 2008 peaks.
The Reserve Bank has kept the key policy rates unchanged, while the Cash reserve Ratio (CRR) has been cut by 25 bps to 4.25%.
RBI has held its short-term lending (repo) rates unchanged at eight per cent since April 2012.
RBI expects more from the government than last week's very limited package of reforms and fiscal measures.
At the Interbank Foreign Exchange (Forex) market, the rupee resumed sharply higher at 53.80 a dollar compared to last Friday's close of 54.30.
Last year SBI's credit growth was 15.6 per cent.
Reserve Bank of India Governor D Subbarao surely knows how to crack a joke even on as mundane a topic as the cash reserve ratio (CRR).
A day after RBI deputy governor's comment, Chaudhuri says his idea on cash reserve ratio was meant to ignite public debate
In view of high inflation and deficient monsoon rainfall, the Reserve Bank may find it difficult to cut the key lending rate to boost the economy as is being demanded by the industry.
With the slack season credit policy due to be announced on April 28, bankers are waiting to see how the Reserve Bank of India reacts to the budgetary proposals on freeing caps on statutory liquidity ratio and cash reserve ratio.
Liquidity in the banking system has slipped into a deficit for the first time in three weeks, prompting banks to borrow the largest quantum of funds from the Reserve Bank of India (RBI) in around a month and a half. The key catalyst for the sudden tightening in liquidity was due to outflows on account of advance tax payments, which occur towards the end of a quarter. Analysts also cited other factors such as a currency leakage and possible interventions by the RBI in the foreign exchange market, which contributed to the tighter liquidity conditions.
Reserve Bank Governor D Subbarao will, however, not touch the policy rate or the repo, rate at which RBI lends to banks, on October 30 when he unveils the half-yearly monetary policy because headline inflation continues to be elevated at 7-7.5 per cent, the agency said.
The transmission of the last cash reserve ratio cut has also not happened fully because that came in March.
Last month, RBI slashed cash reserve ratio -- the percentage of deposits that banks have to keep with the RBI -- from 5.5 per cent to 4.75 per cent. With this, the central bank had infused Rs 48,000 crore (Rs 480 billion) into the economy.
The possibility of key policy rate cut is not bright as industrial output grew by 6.8 per cent in January against just 2.5 per cent in the previous month.
This cut was welcome not just for its well-planned timing, but also for its relative size; the RBI has, too often, moved with baby steps when strides are called for.
'Nations like India with high inflation and public debt should be cautious'
Similarly, 51 per cent of 105 market participants polled by RBS said they do not expect a CRR cut in the quarterly policy announcement next Tuesday.
Wholesale price-based inflation spiked to a record high of 15.08 per cent in April on rising prices across segments from food to commodities. The WPI-based inflation was 14.55 per cent in March and 10.74 per cent in April last year. "The high rate of inflation in April 2022 was primarily due to rise in prices of mineral oils, basic metals, crude petroleum & natural gas, food articles, non-food articles, food products and chemicals & chemical products etc. as compared to the corresponding month of the previous year," the commerce and industry ministry said in a statement.
Experts say the central bank will refrain from using the CRR as a liquidity tool, as a reduction in the rate will go against its current anti-inflationary stance.
CRR stand at 5.5 per cent after a 50 basis points cut in January.
Short-term lending (Repo) rate is unchanged at 8 per cent.
The Reserve Bank on Friday upped the cash reserve ratio from 5 per cent to 5.75 per cent, a move expected to flush-out Rs 36,000-crore (Rs 360-billion) from the system.
