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RBI cuts CRR again by 100 bps to 6.5%

Posted by Yogesh on Wednesday, 15 October, 2008

The Reserve Bank of India, or RBI, has cut the CRR by 100 bps to 6.5% with effect October 11, reports CNBC-TV18. CRR is the amount that banks park with the central bank. The move will inject Rs 40,000 crore into the system.

The banks may borrow up to 50% of free Tier-I from foreign branches. The 0.5% NDTL Leeway on SLR will be in addition to 1% given since September 16. The additional leeway on SLR is purely a temporary measure to meet mutual funds’ cash needs. The central bank said it has been continuously monitoring the liquidity situation. The banks can borrow 0.5% more of NDTL at the special repo to lend to mutual funds. The rate ceiling on 1-3 year NRE(E)RA deposit will be Libor plus 100 bps. The higher FCNR(B), NR(E)RA deposit rates are effective immediately.

On October 10, RBI had cut the cash reserve ratio, or CRR, by 150 basis points to 7.5% to infuse liquidity into the system. This included a 50 bps CRR cut on October 6.The cut injected liquidity to the tune of Rs 60,000 crore into the system.

Earlier today, Finance Minister P Chidambaram said RBI will provide Rs 25,000 crrore to lending institutions immediately, reports CNBC-TV18. “It will give Rs 7,500 crore to commercial banks and Rs 17,500 crore to Nabard, or National Bank for Agriculture and Rural Development.”

RBI’s measures have infused considerable additional liquidity into the market, he said. “The central bank will enable smooth flow of credit for term loans and working capital.”

What do the experts read in to the RBI rate cut move?

Nilesh Shah, ICICI Mutual Fund believes that money markets will be back on its wheel and more than the quantum of response, it is the speed with which the RBI has responded to all the noises made by various constituents. Right now the liquidity committee is going on and still RBI has gone ahead and looking at the requirement of situation it has taken a bold step. This shows that the regulator is awake and it’s working and is delivering to our need and that will give a lot of psychological comfort.

Hemant Mishra, Head, Global Markets, Standard Chartered Bank said, “I would expect call rates below the 9% mark. The fact that the CRR cut is with retrospective effect and most market participants, given what we saw in the last fortnight, would have over covered. I would expect call to open with the gap on the downside.” It could be scraping the bottom of the corridor also, he added. Source Moneycontrol

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