RBI does the trick Cheaper loans on the way

RBI does the trick Cheaper loans on the way

By: || Updated: 09 Mar 2012 06:48 AM

Mumbai: The
Reserve Bank of India announced a massive 0.75% cut in the cash reserve
ratio it stipulates to the banks, opening options for cheaper loans across
the board. The move comes after sustained drop in the overall inflation
index over the last couple of months and the need to infuse more cash into
the economy.

All banks in the country keep a certain amount as
of money as reserve with the RBI as guarantee which is in ratio of the
total deposits it holds, called the Cash Reserve Ratio or CRR. A cut in
this rate means banks will have more money to give out as loan and at
cheaper rates.

RBI statement says: “It has been decided to
reduce the cash reserve ratio of scheduled banks by 75 basis points from
5.5% to 4.75% of their net demand and time liabilities (NDTL) effective
the fortnight beginning 10 March 2012.  This reduction will inject around
Rs 48,000 crores of extra cash into the banking system.”

order to mitigate tight liquidity conditions, the cash reserve ratio was
reduced by 50 basis points in the Third Quarter Review (TQR) of January
2012, injecting Rs 31,500 crores into the banking system. The Reserve Bank
also continued with the open market operations (OMOs), injecting over Rs
124,500 crores this financial year so far.”

Despite these
measures, the liquidity deficit has remained large on account of both
structural and frictional factors. This was reflected in the net average
borrowing under the Reserve Bank's liquidity adjustment facility (LAF)
rising from an average of Rs 1,29,200 crores in January 2012 to Rs
1,40,500 crores in February.

“Further, the liquidity deficit
is expected to increase significantly during the second week of March due
to advance tax outflows and the usual frontloading of cash balances by
banks with the Reserve Bank. Thus, 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 so as to ensure smooth flow of credit to productive
sectors of the economy.”

As already announced, the Reserve Bank
will provide its assessment of the macroeconomic situation in its
Mid-Quarter Review to be published on 15 March 2012.

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