RBI cuts CRR by 25 bps, keeps rates unchanged

Mumbai: The Reserve Bank of India (RBI) on Tuesday cut the cash reserve ratio (CRR) by quarter of a percentage point, freeing up additional funds to the tune of Rs17,500 crore for commercial banks to lend to companies and consumers, but kept its key policy rate unchanged as it battles to douse inflation.

CRR, the portion of deposits that banks have to maintain with the central bank, was reduced to 4.25% in the RBI’s quarterly monetary policy announcement. The repo rate, or the rate at which banks borrow overnight funds from RBI, was left unchanged at 8%.

The latest CRR cut is on top of three reductions by a cumulative 150 basis points since January as part of an effort by the RBI to ease liquidity in the banking system. One basis point is one-hundredth of a percentage point.

The central bank hiked its key policy rate 13 times since March 2010 to control inflation before reversing its stance and cutting the repo rate by a more-than-expected half a percentage point in April.

Persistently high inflation has been a major concern for the Indian central bank, limiting room for further easing in monetary policy despite demands from industry for a lowering of borrowing costs.

India’s wholesale price inflation accelerated to 7.81% in September from 7.55% in August, while the economy grew modestly by 5.5% in the June quarter after logging a nine-year low of 5.3% in the March quarter.

Core inflation, a key indicator for RBI to decide policy action, stood at 5.6% in August and September. Core inflation is a measure of inflation that excludes food and fuel prices that tend to be volatile.

Posted in: CREDIT POLICY