RBI Slashes CRR

The Reserve Bank of India has decided to slash the Cash Reserve Ratio (CRR) by half a percent or 50 basis points thus bringing it down to 8.5%. The move has been taken in order to release cash into the system so that banks find it easier to lend to borrowers.

Manic Monday saw the Sensex crashing to 5.78%, its third biggest fall this year. With global markets all trading in the red, it was an expected fall. The Dow Jones has now fallen below 10000 points – its first in more than four years. The European markets are also suffering and talks are on about a similar bailout package like the one in America which will help the major banks and financial corporations survive these turbulent and uncertain times. The Nikkie, Hang Sheng as well as the other Asian markets also fell on Monday.

Meanwhile, the Reserve Bank of India, in probably the first of a lot of measures to be taken in order to bail out investors, slashed the cash reserve ratio by 0.5 percent. This is the first CRR cut by the RBI since June 2003. Though the move is expected to bring down the interest rates being offered by the banks, it still seems unlikely. For the moment the move is a good one as it will release almost 20,000 crores into the system. This amount may not be enough but as the Reserve Bank has maintained that this is an ad hoc, temporary measure and this move will be watched over carefully. Though there will be liquidity but there is a fear in the market seeing the American and the global crisis and that is why the banks are not lending much. But the move is expected to bring down short term rates in the immediate future.

The Securities and Exchange Board of India or SEBI also decided to do its bit by reducing the curbs on foreign investors over overseas derivate instruments (ODIs) or the Participatory notes (P notes). The move was welcomed by foreign investors but may not translate into much due to the financial crisis elsewhere in the world.

At a time when the global crude oil prices are at a low at almost $90 per barrel, inflation should not rise. But the Reserve bank will have to be wary of the impact of the cut in the cash reserve ratio on the inflation numbers which are currently just below the twelve percent mark. Most of the banks in India though have welcomed the step taken by the Reserve Bank, but have said that it may not impact the interest rates but will definitely increase liquidity in the system thus making it easier for banks to lend. A lot will depend on the global financial crisis and the mood of the foreign investors. But as the Finance Minister has been pointing out, the Indian market is safe and strong despite the global crisis. We can expect more such measures being taken by the Reserve bank in the coming months for the Sensex is trading at a two year low and the mood amongst the investors in the market is grim.
Shishir Shrivastava

[Image Source: http://www.freshnews.in/wp-content/uploads/2008/04/reserve-bank.jpg]