Latest Action at the Indian Central Bank

by: Equitymaster

In an action that speaks volumes of the liquidity crunch facing the Indian financial system, the Royal Bank of India (RBI) has decided to reduce the CRR (cash reserve ratio) by a further 100 basis points (1%) to 6.5% with effect from the current reporting fortnight that began on October 11, 2008. This measure is expected to release additional liquidity into the system of around Rs 400 bn. This takes the total cut in the CRR in this month alone to 2.5%.

  • Also read – RBI’s statement on CRR cut

    As a matter of fact, the Indian central bank, on 10th October (last Friday) had made the steepest cut in the CRR (proportion of deposits lenders need to set aside as reserves) since 2001, slashing the same by 1.5% to 7.5%. That action infused Rs 600 bn into the system.

    The RBI is working in conjunction with the Indian government in defusing the liquidity crisis. The government has advanced the payment of Rs 250 bn to banks for providing debt relief to farmers and has indicated that it will make finance available for lenders to raise their capital adequacy ratio to 12%.

    The RBI's steps in the past week and today are in line with actions taken by policymakers around the world (US, Europe, Japan) to boost money supply and avert a recession.

    Readers would do well to note that the Indian banking system and corporations (especially in the real estate sector) have been severely starved for liquidity on account of the ongoing crisis in the US and Europe. The RBI’s moves have also come in on account of the rupee’s continued decline (6.3% in the last one month alone) against the US dollar.

    The central bank, however, continues to be cautious about alleviating inflationary pressures. Bankers, who saw Friday’s rate cuts as being insufficient to pass on any benefit to customers, are yet to speak on the central bank’s today’s action.

    In the meanwhile, stocks in the US opened deep in the red today. CNN’s financial website says that “a weaker-than-expected retail sales report has reminded investors that bailout or no, the economy is either in a recession or teetering on the brink of one.”