Major banking sector players said they would assess the situation and response of the market before taking a call on cutting interest rates, even though the second largest public sector bank PNB slashed its retail lending rates by half-a-percent even before Wednesday’s reduction in CRR.
"RBI is monitoring developments in the financial markets closely and continuously and would respond swiftly and even preemptively to any adverse external developments impinging on domestic financial stability," the apex bank said announcing release of Rs 40,000 crore through cut in CRR to 6.5 percent.
Similar cuts announced by RBI since 6th October has injected a whopping Rs 60,000 crore and along with Wednesday’s development, banks would get Rs 1,00,000 crore.
Factoring in the Rs 25,000 crore that RBI is releasing under the debt waiver scheme and Rs 20,000 crore for mutual funds, the total liquidity infusion amounts to Rs 1,45,000 crore.
RBI's liberal measures came on a day when stock markets tanked close to 700 points, ending a two-day winning streak that came on the back of government's reassurance that it was continuing to fight the liquidity problems.
RBI Governor D Subbarao returned from New Delhi
Continuing to feed the insatiable appetite of the system, the Finance Minister announced that foreign institutional investors would be allowed to double their limit to 6 billion dollars in the corporate bond market.
In addition, both the RBI as well as the government took steps to give benefits to the depositors, especially non-residents. Besides, Finance Minister P Chidambaram pledged full support to banks for accessing funds to raise their capital adequacy ratio to 12 percent.
Pointing out that the continuing uncertain global situation is having an indirect impact on the financial situation; the RBI said the CRR cut would be effective for the fortnight beginning 11th October, a decision that would immediately release Rs 40,000 crore for the banking system.
The central bank further said that Rs 20,000 crore repo auction facility to enable banks to meet liquidity requirements of mutual funds will continue till the entire amount is auctioned.
The banks have drawn only Rs 3,500 crore from the scheme on the first day of opening of the addition repo window by the RBI on Tuesday.
The central bank further said that a similar facility will be made available for the oil bonds which were instituted under the Special Market Operations (SMO) for public sector oil marketing companies in June-July earlier.
In order to lure non-resident deposits, the RBI has increased the interest rate ceiling by 50 basis points on FCNR(B) and NR(E)RA deposits.
The RBI has also allowed the banks to borrow funds from their overseas branches and correspondent banks up to USD 10 million or 50 percent of their unimpaired Tier 1 capital as against the existing limit of 25 percent.
The decision will help the banks with foreign branches to bring in funds into the country.
Promising to take more measures, the RBI said that "it is committed to maintaining financial stability and active, and flexibility liquidity manegement using all policy instruments is an integral part of this objective."
Commenting on the CRR reduction, Punjab National Bank Chairman and Manging Director K C Chakrabarty said, "It is a welcome step and would ease liquidity pressure. To ensure credit to the borrowers at a lower rate during the festive season we already have cut interest rate in the retail segment even before RBI announced the measure."
However, the bank has to assess the asset liability condition as well as the market rate before taking decision on further cut in interest rates, he said.
Once the liquidity condition eases, the logical conclusion is moderation in the interest rates, said Indian Bank Chairman and Managing Director M S Sundara Rajan.
Welcoming the move that would infuse Rs 40,000 crore in the banking system, he said, it would help in credit expansion for the productive sector.
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