India: RBI Cuts Cash Reserve Ratio

by: Equitymaster

Mr. Market is at it again. And he is sparing no one. He is so depressed that he sees nothing but trouble ahead for both business and the world. Otherwise, what would justify the daily crash that we are seeing in stocks and commodities across the world.

Take yesterday’s case, when the US markets closed with their second largest single day loss (of 733 points) in absolute terms and ninth largest in percentage terms. The index’s biggest loss was recorded on September 29 this year, when the index lost 777 points.

Closely following the Dow are the Asian markets, which are down in a range of 4% (China) to 10% (Japan). The way Indian markets will behave today is anybody’s guess, especially considering the RBI’s late night move yesterday to counter severe liquidity pressure in the economy.

In an action that speaks volumes about the liquidity crunch facing the Indian financial system, the RBI yesterday cut the CRR (cash reserve ratio, or proportion of deposits lenders need to set aside as reserves) by a further 100 basis points (1%) to 6.5% with effect from 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 week alone to 2.5%. 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.