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Cut in CRR rate will give Indian banking Rs 26 billion

The Reserve Bank of India announced a two-phase 50 basis point cut in the prescribed cash reserve ratio to 10 per cent from for 10.5 per cent.

The banking industry is expected to have additional liquidity worth Rs 26 billion following the RBI's move.

The two phases will be implemented in equal measure of cuts of 0.25 percentage points each, the first from the fortnight beginning March 28, and the second from April 11.

According to market sources, the forward swap premium has drifted by 0.5 to one percentage point following the announcement while the overnight call rate was quoted lower in unofficial trading.

During the current fortnight, liquidity continues to be easy with most market players due to year-end considerations, forthcoming tax payments, and the prospect of maturing foreign exchange swaps draining rupee funds from banks.

The 364-day treasury bills, worth Rs 49 billion, will mature before the month-end as will the Rs 30 billion 13.5 per cent 1998 government paper. All this will add to market liquidity.

Notwithstanding the lukewarm response from banks to the RBI's earlier decision of reducing the bank rate, Monday's reduction in CRR has indicated a comfortable monetary situation in the country. This easy trend will continue as long as the foreign exchange and money markets show stability, a RBI official said.

The CRR cuts marks the reversal of the tight-money policy undertaken by the central bank on January 11 in a bid to curb the devaluation of the rupee vis-a-vis the dollar. Last week, the RBI rolled back its fixed-repo rate by 100 basis points to 8 per cent and the bank rate by 50 basis points to 10.5 per cent.

Bankers have, however, ruled out an immediate cut in the prime lending rate, at least not until the current fiscal year ends on March 31. Many analysts believe the CRR cut is a prelude to government borrowings in April while ensuring that the interest rates do not rise.