RBI reduces CRR for liquidity management

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Mumbai, Oct 6 (UNI) Reserve Bank of India (RBI) today reduced the Cash Reserve Ratio (CRR) by 50 bps to 8.5 per cent, effective from October 11.

The move will release Rs 20,000 crore in the system. The CRR level will be monitored on a regular basis, RBI said in a statement here.

CRR is the amount of funds banks have to deposit with the central bank. Easing CRR ensures banks have more funds at their disposal.

The central bank said, ''Active liquidity management is a key element of the current monetary policy stance. Liquidity modulation through a flexible use of a combination of instruments has, to a significant extent, cushioned the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions. In view of the evolving environment of heightened uncertainty, volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.'' RBI said the overriding priority for monetary policy is to eschew intensification of inflationary pressures and firmly anchor inflation expectations.

Abheek Barua, chief economist, HDFC Bank, said: ''RBI shares concern on liquidity with other central banks. We are not isolated but we are better. The CRR cut is a welcome move, and I am glad that RBI has done it.'' He said ''Globally, the focus has shifted to stabilise the financial system. Rules of the game have changed. Global central banks are focusing on financial stability.'' ''Interest rates may come down in the short-term. We were looking at the prospects of a liquidity crunch. I don't see any reason for interest rates to go down, and RBI taking more monetary initiatives for interest rates to go down,'' he said.

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