The Reserve Bank of India on Friday announced a further reduction in cash reserve (CRR) by 100 basis points to 7.5% from 8.5%. On October 6th 2008, RBI had cut the CRR by 50 basis points to boost liquidity in the system.
This cut in CRR is expected to inject about Rs 60,000 crore into the system against the earlier injection of Rs 20,000 crore announced by a 0.50% cut in CRR.
"In the context of the abrupt changes in the international financial environment, it is important to note that the macroeconomic fundamentals of the Indian economy are strong and resilient and that India's financial system is sound, well-capitalized and well-regulated," the bank said in a statement.
A surprise cut in Cash Reserve Ratio by the Reserve Bank of India has soothed some worries of liquidity crunch in the Indian market. The Reserve Bank is committed to maintaining financial stability and flexible liquidity management using all policy instruments.
For months, India's central bank has focused on tightening money supply, to fight double-digit inflation. Thus these cuts in CRR have reversed RBI on its inflation taming policies.
This cut is to be effective from the fortnight beginning October 11th.
CRR is a portion of mandatory deposits that banks have to maintain with the Reserve Bank of India.