RBI maintains high interest rate policy; but cuts CRR to inject liquidity

There is no change in the hard interest rate policy of the RBI as the central bank has kept
the interest rate anchor repo at 8%. The step was more expected as the retail inflation for the last month was nearly 10%.

But at the same time the quantitative instrument of CRR has been cut by 25% to ease
liquidity into the system. The CRR cut will inject RS 17500 crores into the banking system.

The CRR cut is just a seasonal intervention as the economy is coming to the midst of
the busy season and more than that more money is kept at government balances because of the advance tax payment by the corporate sector.

Banks were facing liquidity shortages as they were borrowing nearly one lakh crore
rupees from the RBI’s LAF repo window. Hence, the fresh initiative of 25 bps CRR cut will
make the RBI relieved in its LAF operations.

There will not be any change in the interest rate scenario because of the cumulative 50
basis points cut in CRR during the last two interventions by the RBI. Interest rate will move in
accordance with the repo changes than the CRR changes. The price leader in the banking sectorSBI may not initiate an interest rate cut because of the meager cut in CRR.

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