In a move to soften the interest rates in short and long term loans, the Reserve Bank of India (RBI) on Saturday (Nov 01) has announced to make further deduction in Cash Reserve Ratio (CRR), the slice of amount banks need to park with the apex bank; Statutory Liquidity Ratio (SLR), the minimum quantum of amount banks need to maintain in RBI deposits in the form of cash, gold or securities; and Repo Rate, the short term lending rate at which the Central bank lends money to banks for short term periods.
The Reserve bank has continued to ease the tightening monetary policy since last month after viewing the effect of dipping inflation rate since August 09, 2008. The apex bank had taken tougher action to tighten the monetary policy and sucked huge liquidity from the market by raising CRR, SLR and Repo rate to blunt the axe of inflation that was rising day by day and had crossed the 13-year upper mark by reaching beyond 13 percent.
After reducing the CRR last month by 2.5% in phased manner, RBI has now announced to make further cut down to one percent from current 6.5% to 5.5% in two steps. The first 50 basis points (bps) reduction would be effective from October 25 and another 50 bps reduction will come into effect from November 08, 2008. This new reduction will help the Bank to inject the Rs.40,000-crore in to the banking system, as only from CRR, RBI would inflow 1.40-lakh crore rupees in to the system.
RBI has also chop down the short term loan rates SLR by 100 bps to 24% that will come into effect from November 08, 2008. The master bank has also introduced a new facility to provide refinance to the banks up to 1% of their Net Demand and Time Liabilities (NDTL) under Liquid Adjustment Facility (LAF) of repo rate for maximum 90 days.
According to Section 17 (3B) of RBI Act, 1934, all scheduled commercial banks (excluding RRBs) will be provided refinance from the Reserve Bank equivalent to up to 1.0 per cent of each bank's NDTL for a maximum period of 90 days. During this period, refinance can be flexibly drawn and repaid.
Besides, the central bank has also sliced the overnight lending fund rate by 50 basis points to 7.5%, which it had deducted 100 bps last month from 9 percent to 8 percent to reduce the short term interest rate.
This move of RBI will definitely affect the home, auto, consumer durables and corporate loans and provide some relief to short and long term lending sector.
In an official statement RBI stated, “The Reserve Bank has reviewed the current and evolving macroeconomic situation and liquidity conditions in the global and domestic financial markets.”
“On the growth front, it is important to ensure that credit requirements for productive purposes are adequately met so as to support the growth momentum of the economy. Domestic financial markets have been functioning normally. Prudent regulatory surveillance and effective supervision have ensured that our financial sector has been and continues to be robust,” it added.
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