The Reserve Bank of India in a surprise move has cut the CRR by 100 bps taking the total cut in the past 10 days to 250bps. CRR is now down from 9% to mere 6.5%. This is probably one of the sharpest cuts in the Indian financial history. The move will infuse Rs 40,000 crore liquidity into the system, thus meeting the industry’s demand of Rs 100,000 crore put forth few days ago.
Additionally, the RBI has also revised Interest rates on FCNR and NRE deposits upwards. With immediate effect, the interest rate ceiling on FCNR (B) deposits will go up by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.
Also with with immediate effect, the interest rate ceiling on NR(E)RA deposits will go up by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.
Subbarao Vs Reddy:
Ex-RBI governor, Dr. Reddy had raised CRR to cool off the inflation which had hit 13%. With global commodities under pressure and Crude Oil almost halved from its high of $140 a barrel, Subbarao, the current RBI governor is probably estimating Inflation to go below 10% within the next few weeks and thus cut CRR.
The goal behind current RBI rate cut is to help the Indian Industry, really especially the manufacturing. Only time will tell if Banks lend the money to SMEs and Industries to fuel IIP output or lend into the speculators of Real Estate responsible for current worldwide problems.