RBI cuts banks’ reserve requirements, a precursor to policy rate easing
Subscribe to enjoy similar stories. We have been talking about the Reserve Bank of India (RBI) easing interest rates for quite some time. The question now is: what is the appropriate time for the RBI to initiate this? The latest meeting of the central bank’s Monetary Policy Committee (MPC) was on 6 December.
Earlier, there were expectations that the rate easing cycle would be initiated at this review meeting. However, inflation figures for October, released on 12 November, were a dampener. Inflation came in at 6.21%, higher than the markets expected and above the RBI’s tolerance limit of 6%.
Against this backdrop, the 6 December meeting was expected to provide clues about future action on rates. While policy rates were left unchanged as expected, there were quite a few points worth noting from the meeting. The cash reserve ratio (CRR) is the amount of money that banks must park with the RBI, on which the central bank does not pay any interest.
CRR, which was 4.5% deposits with banks, is now being reduced to 4%. This will release a chunk of money into the banking system – about ₹1.16 trillion. The reason for the CRR reduction is that banking system liquidity was under pressure as foreign portfolio investors (FPIs) made sizable exits in October and November.
Now that banks have to park less money with the RBI, day-to-day liquidity in the banking system will improve. Also read | Prudence wins the day: RBI didn't go in for a knee-jerk rate cut Banking system liquidity moves between surplus and deficit depending on various parameters. The RBI controls or at least influences it.
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