Proactive RBI

The Reserve Bank of India (RBI) has decidedly shifted its monetary stance in favour of growth by taking a slew of measures including cuts in the signal repo rate, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). It plans to buy back market stabilisation scheme bonds issued earlier to sterilise the expansionary impact of huge capital inflows.
In a weekend surprise move, it cut the repo rate (the rate at which it lends to banks, and which, in turn, is a signal to banks for paring their lending rates) by 50 basis points to 7.5 per cent. This is the second reduction in the last two weeks. The RBI had pared the repo rate by 100 basis points to 8 per cent on October 20. The latest cut is clearly aimed at encouraging investments by making funds more affordable to borrowers and removing apprehen sions regarding the change in its policy stance.
With liquidity conditions remaining tight during the week and call money rates soaring to 21 per cent on Friday, the central bank further slashed the cash reserve ratio (the portion of deposits banks need to keep with the RBI without earning any interest) by 100 basis points to 5.5 per cent. This will infuse Rs 40,000 crore into the system in two equal tranches, starting on October 25 and November 8. The reduction in CRR comes on top of the 250 basis points cut in the second half of October that had injected Rs 100,000 crore into the system.
In a statement on its website, the RBI said that Saturday’s measures were “in view of the ebbing of upside inflation risks as also to address concerns relating to the moderation in the growth momentum”. RBI Governor D Subbarao recently acknowledged that the indirect impact of the global crisis on countries such as India is by no means trivial or insignificant. Clearly, today’s measures reflect those concerns and the government’s resolve to keep the growth juggernaut running.
The RBI has also reduced the statutory liquidity ratio—the portion of bank funds to be invested in government securities—by 100 basis points to 24 per cent of deposits with effect from the fortnight beginning November 8. The SLR was cut temporarily by one per cent earlier to 24 per cent and this cut has been made permanently effective.