RBI cuts cash reserve ratio by 150 basis points

October 10th, 2008 - 9:48 pm ICT by IANS  

Mumbai, Oct 10 (IANS) India’s central bank, the Reserve Bank of India (RBI) announced Friday that the cash reserve ratio (CRR) will be reduced by 150 basis points (bps) to 7.50 percent of net demand and time liabilities (NDTL) instead of 50 bps announced Oct 6, 2008, to inject Rs.600 billion liquidity into the system.According to RBI regulations, the cash reserve ratio determines the amount of cash that commercial banks must always retain from the deposits made by their customers, technically called net demand and time liabilities (NDTL).

Banks have to maintain the ratio on a fortnightly basis.

It is expressed as a percentage of deposits or NDTL and the RBI announced Friday that this percentage is being brought down to 7.5 percent from the existing 9 percent with effect from the fortnight beginning Saturday, Oct 11, 2008.

The cut will result in freeing Rs.600 billion ($15 billion) of cash in the hands of Indian banks and enable them to use this extra liquidity to service depositors or lend to borrowers.

As a result of this higher reduction in the CRR, a higher amount of about Rs.600 billion would be released into the system instead of the injection of Rs.200 billion that would have happened if the CRR cut was only 50 bps announced earlier, the RBI said in a statement Friday.

On Oct 6, 2008, the RBI announced a reduction of the CRR for scheduled banks by 50 basis points to 8.5 percent of NDTL with effect from the fortnight beginning Oct 11, 2008.

“This measure was undertaken with a view to injecting liquidity into domestic financial markets so as to alleviate the pressures brought on by the deterioration in the global financial environment,” the RBI release said.

“In the ensuing days, the global situation has worsened further. International stock markets and money markets had been adversely affected in a significant manner,” the RBI said.

“Central banks across the world have responded to these extraordinary developments by synchronised policy actions including measures for liquidity infusion,” the release added.

The RBI release said: “In the context of the abrupt changes in the international financial environment, it is important to note that the macroeconomic fundamentals of the Indian economy are strong and resilient and that India’s financial system is sound, well-capitalised and well-regulated.”

“Money and forex markets in India have been operating in a relatively orderly manner. The current domestic market conditions are essentially a reflection of the adverse developments and extreme uncertainty in international financial markets,” the release said.

“Market participants are assured that the RBI stands ready to respond swiftly to meet any liquidity requirements that may arise in the context of the highly volatile external situation,” the statement said.

The RBI said it is monitoring developments closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy.

The statement said that the RBI is committed to maintaining financial stability and active and flexible liquidity management using all policy instruments is an integral part of this objective.

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