Tuesday, September 18, 2012

Effect of CRR cut on banking industry and Economy

The Reserve Bank of India (RBI), cut the Cash Reserve Ratio (CRR) by 25 basis points to 4.50 per cent while retaining the indicative policy rates at the current level. The CRR cut will inject a liquidity of around Rs.17,000 crore into the banking system.

“Since the first quarter review, while growth risks have increased, inflation risks remain…….In the current situation, persistent inflationary pressures alongside risks emerging from twin deficits - current account deficit and fiscal deficit - constrain a stronger response of monetary policy to growth risks,” RBI's Mid-quarter Review of the Monetary Policy say.

“Monetary policy also has an important role in supporting the growth revival,” it says. 
CRR is the portion of deposits that banks keep with the RBI, and it does not earn any interest for banks. Which means for banks it is a dead asset. This year so far RBI slashed CRR by 150 basis.

The reports adds further, “Liquidity conditions have remained comfortable since the first quarter review. However, going forward, the wedge between deposit growth and credit growth could widen on the back of the seasonal pick-up in credit demand in the second-half of the year.”, which shows RBI did this with a future outlook. 


The short-term policy rate, repo rate, unchanged at 8 per cent and Reverse repo rate at 7 per cent. Repo rate is the rate at which banks borrow funds from the RBI, and Reverse repo is the rate at which banks park their funds with the central bank.

However, the central bank complemented the government for taking actions to spur growth, and contain fiscal deficit, mentioning goverment's policy decisions of FDI in retail, aviation and broadcasing and fuel price hike.

“Headline Wholesale Price Index (WPI) inflation (year-on-year) has remained sticky at around 7.5 per cent throughout the current financial year so far….Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky,’’ RBI said.

In terms of the new Consumer Price Index (CPI), the RBI said, inflation (year-on-year) remained broadly unchanged in July from June at close to 10 per cent, held up by rising prices of food items. Notwithstanding some easing in July, core CPI inflation (CPI excluding food and fuel sub-group) remains elevated.

Worth reading