In its second quarter review today, the Reserve Bank of India (RBI) reduced banks’ cash reserve ratio (CRR) by 25 basis points to 4.25 per cent. However, the key policy repo rate has been kept unchanged at 8 percent. “As result of this reduction in the CRR, around Rs175 billion of primary liquidity will be injected into the banking system.” the RBI said in its statement today.
What has happened so far:
In mid September RBI had reduced Cash Reserve Ratio (CRR) by 25 basis points to 4.50 percent. But, had kept the key policy repo rate unchanged at 8 percent. CRR is the amount of money banks have to park with the RBI. The 25 basis point cut in CRR freed up a total of Rs 17,000 crore for banks. Followed by this many banks cut their rates on various loans. Many banks also decreased the banks base rate, or the rate below which the banks are not permitted to lend. Due to which not only lending rates came down, even fixed deposits saw a fall in there interest rates.
What is expected by RBI after this move:
RBI monetary policy is expected to enable liquidity conditions, which is further expected to facilitate a turnaround in credit growth to productive sectors, this is eventually expected to support growth.
The statement also said: “this will reinforce the growth stimulus of the policy actions announced by the Government as inflation risks moderate.” The apex banks also expects to anchor medium-term inflation expectations.
“If a CRR cut is not backed by a rate cut it doesn’t make sense and this is unlikely to be reviewed before December. By sending more liquidity into the system the RBI is trying to ask banks to take the pressure. The excess liquidity will go towards projects, banks will be pressurised to lend but buyers might not feel confident about spending after borrowing at high rates. You have to allow expenditure to take place in the system so there is infrastructure development which will kick-start the economy.” told Reuters, Deven Choksey, MD & CEO, K R Choksey.
What it means for you:
As mentioned earlier, this 25 basis point cut in CRR is freeing up a total of Rs175 billion of primary liquidity in the banking system. CRR is the amount of money banks have to park with the RBI. Typically, when CRR is decreased, bank liquidity increases, which results in decreased cost of funds. However, there won’t be an immediate reduction of rates from banks side. At the banker meet with media, Chanda Khochar, MD, ICICI Bank said, “There won’t be any immediate cut in the bank’s lending rates. There should be softening of lending rates gradually this fiscal.” Some experts think, that even if rates do fall, later on, it will fall by a small amount of 10-15 basis points to begin with. A few bank had decreased their base rates in the recent past.
Prateek Chaudhary, CMD, SBI, said, “We will take a call regarding the the rate in our ALCO meeting in a couple of days.” He also added, that SBI prefers a secular rate cut instead of a mere base rate cut. Base rate is a benchmark rate and the minimum rate banks offer their borrowers.
As far as borrowers goes, Fixed Deposit rates have already seen a southwards dip, and these interest rates are expected to fall before lending rates start falling. As far as bond prices go, they are expected to rise.