In a surprise move, RBI has cut cash reserve ratio (CRR) by 75bps today (effective March 10th). Both the timing and the extent of the move came as a surprise as markets had been expecting a 50bps cut on 15th March mid-quarter monetary policy review.
The move will inject ~INR480bn of primary liquidity into the system, and is purely aimed at tackling persistently high liquidity deficit in recent months. Advance tax outflow in the coming week and frontloading of cash balances by banks in the first week of reporting period would have only added to the liquidity deficit. With this move, we now expect a status quo (no change in policy rates) in the forthcoming monetary policy review.
The move by RBI is being seen as aggressive even as the timing (just 4-5 days ahead of policy meeting) also comes as a surprise. We think the move should help improve the liquidity situation materially. It is notable that the liquidity situation could turn much more benign in April-May because of the sizeable redemption of government securities to the tune of ~INR600bn during these two months. After this move, we see RBI maintaining a status quo on policy rates in its monetary policy review on 15th March.
Positive for the Equity Markets on Monday
