India’s central bank frees more money for credit

March 9th, 2012 - 7:55 pm ICT by IANS  

Pranab Mukherjee Mumbai, March 9 (IANS) In a bid to free more money for commercial banks to lend, India’s central bank Friday cut a key rate that determines the amount of funds such institutions have to compulsorily hold as cash against their deposits.

The move, which comes less than a week ahead of Reserve Bank of India’s (RBI) review of the monetary policy for this fiscal here March 15, will release additional liquidity of Rs.480 billion into the system.

This follows the announcement by the central bank that the cash reserve ratio (CRR) for scheduled commercial banks has been cut from the ensuing midnight by 75 basis points to 4.75 percent from 5.5 percent earlier.

“In order to mitigate tight liquidity conditions, the cash reserve ratio was reduced by 50 basis points in the third quarter review of January 2012 injecting primary liquidity of Rs.315 billion into the banking system,” the central bank said.

“The Reserve Bank also continued with open market operation, injecting primary liquidity of over Rs.1,245 billion this financial year so far of which Rs.528 billion was injected after the third quarterly review.”

The announcement came soon after RBI Governor D. Subbarao called on Finance Minister Pranab Mukherjee in New Delhi a few days ago, which was described as routine meeting ahead of policy reviews, but had evoked expectations about a policy intervention.

The central bank took the initiative after it was assessed that the liquidity deficit in the system was expected to increase significantly during the second week of March due to advance tax outflows.

“The overall deficit in the system persists above the comfort level of the Reserve Bank. Accordingly, it has been decided to inject permanent primary liquidity into the system by reducing the CRR to ensure smooth flow of credit to productive sectors.”

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