Your wait for borrowing at softer interest rates from banks has got a bit longer as the Reserve Bank of India on Tuesday refrained from cutting key policy rates in its third quarter review of the monetary policy.

Even as it maintained status quo on interest rates, the RBI, in a bid to ease liquidity pressures in the banking system, cut the Cash Reserve Ratio, the amount of cash that banks have to mandatorily park with it, by 50 basis points from 6 per cent to 5.50 per cent of deposits.

The RBI Governor, Dr D. Subbarao, emphasised that the cut in CRR was a reversal of the central bank's (tight) monetary policy stance.

“If you treat both the policy interest rate and the CRR as monetary policy instruments, you could draw one interpretation — that this is a reversal of our monetary policy stance.

“In RBI's view, the CRR is a monetary policy instrument with liquidity dimensions. After all, the reduction in CRR will bring down the cost of money for banks. It will have a bearing on their ability to reduce the lending rates,” said the Governor. The CRR cut is expected to inject around Rs 32,000 crore of primary liquidity into the banking system, which has been reeling under a liquidity crunch.

Lending, deposit rates

With the RBI holding back on cutting interest rates due to increased inflation risk from global crude oil prices, the lingering impact of rupee depreciation, and slippage in the fiscal deficit, banks are unlikely to immediately reduce lending rates. Deposits rates too may hold steady. Based on the current inflation trajectory, including the fact that there is considerable suppressed inflation, it is premature to begin reducing the policy rate, the RBI said.

The central bank warned that in the absence of credible fiscal consolidation, it will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending.

Stock market up

The equity markets gave the thumbs up to RBI's policy. The benchmark BSE Sensex closed 1.46 per cent (or 244 points) up at 16,996 points as bank and capital goods stocks surged.

“In reducing the CRR, the RBI has attempted to address the structural liquidity pressures in a way that is not inconsistent with the prevailing (anti-inflationary) monetary policy stance. The large structural deficit in the system presented a strong case for injecting permanent liquidity into the system,” said an RBI statement.

Mr Pratip Chaudhuri, Chairman, State Bank of India, said a cut in deposit rates will depend on the rates offered by competing instruments such as tax-free bonds, tax-saving bonds, and so on.

kram@thehindu.co.in,priyan@thehindu.co.in

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