In a surprise move, the Reserve Bank on Friday slashed the cash reserve ratio (money that banks must keep with the RBI) by a hefty 75 basis points, or three-fourths of one per cent, from 5.5 per cent to 4.75 per cent effective the fortnight beginning March 10.
The markets and the corporate sector were expecting the CRR cut on March 15 when the RBI is scheduled to announce its mid-quarter review. But the central bank said on Friday it feared a liquidity crunch due to the advance tax (to be paid before March 15) outflows; and this would have increased the already tight position of banks due to the usual frontloading of cash balances with the RBI.
This CRR cut will inject around Rs 48,000 crores of primary liquidity into the banking system. Earlier in January, the cut in CRR of half a per cent injected Rs 31,500 crores into the banking system. The CRR cut was welcomed by banks and the corporate sector.
ICICI Bank chief Chanda Kochhar said the 75-basis point CRR cut was a “proactive step” by the RBI, and added: “This would also ensure continued smooth flow of credit into the corporate and retail sector.”