The Reserve Bank of India does not want liquidity to be a constraint to economic activity, said Subir Gokarn, Deputy Governor, explaining the rationale for the Cash Reserve Ratio (CRR) cut announced on Monday.
The central bank cut the CRR by 25 basis points to 4.50 per cent in its mid-quarter policy review. This has triggered expectations that banks will ease their lending rates as they will have Rs 17,000 crore (released as a result of CRR cut) more to lend.
CRR is the slice of deposits that banks are required to keep with the RBI. The central bank uses CRR as a monetary policy tool to manage liquidity in the banking system.
“We took a bit of a forward look. Typically, we have seen that around the festival season liquidity tends to tighten up a bit. So, given that there have been policy action and fiscal correction to some extent, we felt that liquidity should not become a constraint and hamper the economic activity,” Gokarn said on the sidelines of an event.
CRR has been a bone of contention between bankers and RBI. SBI Chairman Pratip Chaudhari has called for either its phase out or payment of interest on the balances by the RBI.
Gokarn said that Open Market Operations (OMOs) — the purchase and sale of government securities from banks by the RBI — option will always be a choice for the central bank to manage liquidity.
“OMOs are tactical instruments and if there is a liquidity crunch, using the OMO option remains. However, OMOs are not planned in advance… they are in response to a particular situation,” Gokarn said.
The RBI Deputy Governor said that some risks perceived earlier have played out, while some new risks have emerged.
He said that there is better clarity now on the monsoon front. “We have a much better handle on the impact of monsoon on food prices. Late rains may be slightly more positive for the rabi crops,” he said.
He, however, said that oil is back in focus because it has been hovering around $110-115 per barrel and is showing signs of stabilising at these levels.