The banking and monetary regulator, Reserve Bank of India, left key policy rates unchanged but reduced its cash reserve ratio (CRR) by 25 basis points in its mid-quarter monetary policy review. Cash reserve ratio is the amount that banks need to keep with the central bank.
Earlier, the CRR was fixed at 4.75 percent, and with the reduction of 0.25 percent, the CRR has come down to 4.50 percent. The new rate will be effective from September 22, 2012. The rate cut is expected to release Rs. 17, 000 crore in the banking sector.
The move of RBI, to keep other important policy rates unchanged but slashing CRR, has been appreciated by many experts of the banking sector. Mr. M.D. Mallaya, the Chairman and Managing Director of Bank of Baroda has said that the rate cut could be a sentiment booster. As a result of this, there would be an increase in liquidity in the economy which stimulate banks to cut lending rates.
While releasing its monetary review, RBI said that because of the inflationary conditions of the economy and risks arising out of current account and fiscal deficit, the central bank could not take a stronger monetary policy measures. Additionally, justifying its decision of keeping the repo rate unchanged, RBI said that it front loaded the repo rate cut by 50 bps in April.