The much anticipated revision of monetary policy by the RBI makes a 50 bps cut in CRR, releasing additional liquidity by around Rs 32000 crores. Many in the market consider it as a pleasant surprise.  The CRR cut is a relief for the banking system, the entire financial market as well as for the RBI. The banks were drawing around one lakh crore rupees from the RBI daily under the Repos facility. Now they can avail more liquidity on their own. The CRR cut augments natural liquidity in the system by helping banks to find money out of their own funds. Of course, the banks were continuously relying on RBI’s repo window too much over the last two months

For the financial system as a whole, the measure will ease cost for funding their immediate needs. The call rate is staggering at around 9% because of liquidity pressure. Given the financial year is nearing to the busy end months; the liquidity enhancement through the 50 bps cut is beneficial for the system. For the RBI, the pressure on the LAF window also may come down because of in built liquidity increase with the banks due to the CRR cut.

The monetary policy revision thus, is largely a liquidity management exercise as the repo rate has not been revised. From a pro-growth perspective, the RBI hasn’t touched on interest rate is quite disappointing. Monetary policy declaration in sum, indicate that the present high interest rate is to remain; at least till the RBI is convinced, or the inflation mark comes within the central bank’s comfort zone of 7%.

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