RBI cut the Cash Reserve Ratio (CRR) by 50 basis points from 6 per cent to 5.5 per cent

The Reserve Bank of India (RBI) on 24 January 2012 cut the cash reserve ratio (CRR) by 50 basis points from 6 per cent to 5.5 per cent with effect from 28 January 2012. RBI thus released Rs 32000 crore to banks through a half percentage point cut in the cash reserve ratio. Home loans and other loans to individuals and businesses will become cheaper with the cut in CRR.

The RBI also kept the repo rate unchanged at 8.50 per cent for the second consecutive time after raising it 13 times between March 2010 and October 2011. It lowered its growth forecast to 7% from 7.6% earlier.

The cut marked RBI’s first reduction in CRR since January 2009 when it had released funds to stimulate demand in the wake of the Lehman Brothers crisis. As a consequence, for the first time in over two months, the rupee touched the 49-mark against the dollar in intra-day trade.

The central bank decided to reverse a two-year policy of interest rate hikes because of decelerating growth although inflation continued to remain a concern. RBI was prompted to ease liquidity because of a structural shortfall which was forcing banks to borrow anywhere between Rs 1.25 lakh to Rs 1.5 lakh from RBI in January. The RBI's action is seen as an attempt to strike a balance between risks to growth and inflation.

Cash Reserve Ratio

The CRR cut is a positive development for banks which can earn interest income of over Rs 3000 crore on funds which were hitherto locked with the RBI. CRR is the percentage of deposits that commercial banks must keep with the central bank. Repo rate is the rate at which banks borrow from the central bank.