Is Reserve Bank of India (RBI) Governor D. Subbarao using the
liquidity route to counter slowing demand? That seems to be the message from his move to slash the cash reserve ratio (CRR) as well as the
statutory liquidity ratio (SLR). Earlier too, in its July monetary policy review, RBI had unexpectedly slashed the SLR by one percentage point to 23 per cent.
In Monday's mid quarter monetary policy review, RBI has cut the CRR by another 25 basis points to 4.50 per cent. The current CRR cut is expected to pump Rs 17,000 crore into the banking system, which will ultimately find its way to the market in the form of loans to retail as well as corporate borrowers. The comfortable liquidity position today coupled with the gradual fall in the banks' deposit rates will help to marginally
reduce interest rates in the economy.
Banks, both public and private, have already been responding by reducing deposit rates whenever RBI cuts either the SLR or the CRR. In the past month, many leading banks such as State Bank of India, ICICI Bank and HDFC Bank have reduced deposit rates. SBI, for instance , reduced its interest rate from 7.50 per cent to 6.50 per cent for deposits of less than a year , while for one to two years the rate was cut from nine per cent to 8.5 per cent. The lower borrowing cost will be soon be reflected in the lending rates for products like home loans and car loans.
There are expectations that
RBI will further bring down the CRR by 50 to 100 basis points in coming months to infuse more liquidity and stimulate seasonal demand, especially with the festival season and advance tax payments coming up in the next three months. Overall, liquidity infusion measures are going to have a positive impact on investor sentiment. The gradual liquidity easing by the RBI together with the weekend reforms announced by the UPA Government is expected to lift sagging economic sentiment.
Undoubtedly Governor Subbarao is not taking his eyes off the inflation rate, which is still not in the comfort zone. In the latest monetary review, RBI has kept the repo rate unchanged at eight per cent. He has clearly listed the continuing inflationary pressures, weak domestic currency against the US dollar, fear of higher commodity prices - especially oil, on the back of further liquidity infusion in the US - and widening fiscal deficit in India. The RBI last reduced the repo rates by 50 basis points early this year. And if the fuel hike and proposed PSU disinvestment - part of the reform package announced last week-- lead to the desired results and improve fiscal deficit numbers, a reduction in the repo rate is also not far away.
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