Sunday, March 11, 2012

RBI cuts CRR to face year end liquidity shortages

The RBI has made a surprisingly higher 75 basis points cut in CRR to inject nearly 48000 crores rupees into the economy. Already liquidity in the economy was very tight due to the busy financial year end situation.
 Usually, March being a busy last month of the financial year, witnesses liquidity tightness. Money is to be supplied quickly to facilitate transactions. This year, the RBI’s repo window was very active in providing liquidity even before the start of the month. Hence, the present move is worthy to supply enough money into the tight market.
            Liquidity shortage was present over the last few weeks compelling the RBI to inject more that 2 lakh crore rupees on a daily basis through the repo window. Call money rates also ruled high for the last two weeks remaining nearer to the unhealthy double digit figure. For the RBI, the present CRR cut definitely ease pressure on its LAF operations.
            On interest rate, the present CRR cut is unlikely to initiate an interest rate cut on its own. But the CRR being the most important liquidity instrument is now near to its low level. If the RBI makes a 50 basis points repo cut in the next scheduled monetary policy intervention on 15th of this month, it will definitely invite the much desirable and expected interest rate cut responses from the banks.  
            The most notable point about the RBI’s unscheduled intervention is that the CRR is now near to the pre crisis low of 4.5%. This means that in the immediate future, RBI gets less space to enhance liquidity by using the CRR further, though there is no low ceiling for it.

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