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RBI Reduces Cash Reserve Ratio (CRR) By 50 Points

Reserve Bank of India declared that it’s not going to cut key policy rates or interest rates in the third quarter review of the monetary policy on Tuesday. This decision was taken keeping in mind the increased inflation risk. The same is the case with interest rates and liquidity pressure in the banking system.

CRR, Repo, WPI & Reverse Repo Graphs

CRR, Repo, WPI & Reverse Repo Graphs

RBI is also planning to cut the Cash Reserve Ratio, the amount of cash which is obligatory for banks to park with it, by 50 basis points from 6% to 5.50% of deposits which is close to our predictions last week. It is expected that this CRR cut will give around Rs 32,000 crore of primary liquidity into the banking system.

However a warning statement was given by the Central Bank that in case of lack of credible fiscal consolidation, RBI will be constrained from decreasing the policy rate which may lead to decelerating private consumption and investment spending. But the equity markets seem to be along with RBI’s policy as the benchmark BSE Sensex closed 1.46% (or 244 points) up at 16,996 points.

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