RBI: cash reserve ratio is more than a liquidity tool

The 50 basis points cut in the cash reserve ratio by the RBI was described as "dovish" by a senior bank official.

 

"The RBI has adopted a more dovish policy stance than anticipated by most in the markets by cutting the CRR by an aggressive 50 basis points to 5.5 percent. Recent comments by senior RBI officials seemed to emphasize that the CRR is not only a liquidity management tool but also an anti-inflationary instrument. A cut would, therefore, prima facie mean an easing of the vigil on prices," said Abheek Barua, chief economist at HDFC Bank.

The CRR is the amount against deposits which commercial banks have to keep as liquid assets such as cash.

"The fact that the RBI governor chose to go the whole hog and cut the CRR not just by a token 25 bps but by a full 50 bps despite the fact the December core inflation print was a rather high 7.7 percent is an indication of the RBI's growing concerns over liquidity and growth," he said.

According to Barua, the Reserve Bank of India has conveyed that CRR cut is not a liquidity enhancing move but a signal instrument that more easing lies ahead.