RBI cuts CRR by 75 bps, move to add Rs 48K cr in system

Ahead of the mid-quarter monetary policy on March 15, the Reserve Bank of India (RBI) stepped in to ease the tight liquidity conditions in the system. It slashed the cash reserve ratio (CRR) by 75 basis points to 4.75%. The market was expecting a cut of 50 bps. This move is expected to pump in Rs 48,000 crore liquidity support into the market.

CRR is the portion of net demand and time liabilities (NDTL) (read, total deposits) that banks have to mandatorily keep with the regulator. This means, from March 10 onwards, banks are now required to keep only 4.75% of their NDTL instead of 5.50% earlier.

"Despite (earlier) measures, the liquidity deficit has remained large on account of both structural and frictional factors. This was reflected in the net average borrowing under the RBI's liquidity adjustment facility (LAF), rising from an average of Rs 1,29,200 crore in January 2012 to Rs 1,40,500 crore in Feb. Net injection of liquidity through LAF rose to a peak of Rs 1,91,700 crore on March 1, 2012," RBI said in a release.

In the last few weeks, banks were seen (net) borrowing more than Rs 1.50 lakh crore from the RBI's liquidity adjustment facility (LAF) on daily basis.

Banks' net borrowing from RBI's LAF window:

Date	Amount Rs in crore
March 7	1,26,280
March 06	85,420
March 05	1,03,400
March 02	1,59,460
March 01	1,91,665
February 29	1,79,710
Feb 28	1,80,645
Feb 27	1,79,400
Feb 24	57,390
Feb 23	1,37,985
Feb 22	1,36,295
Feb 21	1,30,305
Feb 17	1,63,935
Feb 15	1,68,435

Some big public sector banks holding excess SLR bonds (the portion of deposits banks keep in government bonds), according to the market participants, might be borrowing from repo window at 8.50% and lending it to the inter-bank call market wherein the rate of interest was hovering around 9%. Thereby, they would be earning a spread of around 50 basis points. With higher funds requirments, smaller banks would be borrowing aggressively from the call market. Moreover, four state elections too added to the demand for funds.

"The liquidity deficit is expected to increase significantly during the second week of March due to advance tax outflows and the usual frontloading of cash balances by banks with the Reserve Bank. Thus, the overall deficit in the system persists above the comfort level of the Reserve Bank," said RBI  adding that it prompted the regulator to go for a CRR cut ensuring smooth flow of credit to productive sectors of the economy.

The liquidity enteres the RBI's comfort zone only when the daily LAF borrowing falls to around Rs 60,000 crore (or 1% of the NDTL in the entire industry).

To mitigate the worsening liquidity situation, RBI earlier took steps from time to time. It had cut CRR by 50 bps last January. It continued to do open market operations (OMOs), a process through which the regulator either injects liquidity or sucks out excess liquidity by buying or selling government bonds from the banks.