The RBI did not cut the cash reserve ratio (CRR) which is currently at 4%. CRR is the amount of deposits that is parked by banks with the central bank as part of statutory requirements. This does not earn any amount for banks. A cut in the ratio would therefore free up those resources for further lending.

Given the FCNR B deposits redemption that is expected during the course of the next few weeks, the system is expected to have some liquidity pressures. About $30 billion came in three years ago under this route and a significant portion of this will now have to be redeemed. Banks will have to use their rupees to buy the dollars necessary and this is expected to make liquidity tight in the coming weeks. The market was therefore expecting an announcement in this regard.

The MPC statement noted that liquidity conditions have remained comfortable in Q3, with the Reserve Bank absorbing liquidity on a net basis through variable rate reverse repo auctions of varying tenors. Liquidity was injected through open market purchases of 200 billion in line with the system’s requirements, the statement noted.

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