CRR STEEPLY  REDUCED  BY  75  BPS  -  CRR DOWN FROM 5.50% TO 4.75% wef 10th March, 2012

by

Rajesh Goyal, allbankingsolutions@gmail.com

9th March, 2012 : RBI has decided that in order to inject additional funds in the banking system,  the Cash Reserve Ratio  (CRR) of scheduled banks will be reduced by 75 basis points (bps) from 5.50% to 4.75% of their Net Demand and Time Liabilities (NDTL) effective from the fortnight beginning 10th March, 2012. 

It has been estimated by RBI that this reduction of 75 bps in CRR will pump about Rs.48,000 crore (or Rs.480 billion) in the banking system. 

Although in January 2012 itself, RBI has reduced CRR by 50 bps to inject Rs31,500 crores and resorted to Open Market Operations (OMOs) injecting primary liqudity of over Rs1,24,500 crores in the current financial year, yet the liquidity in the system remained tight on account of, what RBI terms as, structural and frictional factors. 

The last date for payments on account of Advance Taxes is 15th March, 2012.   RBI rightly felt the pulse of the market and assessed that outflow on account of advance tax payments can severely lead to liquidity crunch.   In order to avoid such a situation  it has been decided to inject permanent primary liquidity into the system by reducing the CRR so as to ensure smooth flow of credit to productive sectors of the economy.

We feel that this is a timely decision to save the banking industry from the cash crunch.  However, there is a need for caution as reduction in CRR will increase the money supply and banks may start offering loans at a lower rate, which will put pressure on inflation.

Lets see whether the RBI's right step is taken positively by banks in India and the released money is not diverted to financing loans to Air India or Kingfisher !!

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Copy of the Notification Issued by RBI :