Budget 2012: RBI may reduce CRR by 0.5%, says Royal Bank of Scotland

MUMBAI: The Reserve Bank of India is likely to reduce the cash reserve ratio by 50 basis points in the next mid-term policy review, a top official of Royal Bank of Scotland ( RBS) said here on Tuesday.

Also Check: Budget 2012 at ET | Union Budget | Rail Budget 2012 | Budget News

"The RBI may reduce the CRR by 50 bps in the upcoming mid-term policy review to tide over liquidity crunch in the system," Head of Investment Strategy of RBS Private Banking-India, Rajesh Cheruvu said on the sidelines of an event here.

Currently, banks have been borrowing around Rs 1.5 lakh crore per day from the repo window of the central bank, indicating huge liquidity deficit in the system.

Though the RBI had slashed CRR by 0.5 percentage in the last policy review, liquidity deficit still persists in the system due to factors like intervention by the apex bank in forex market, among others.

Referring to possible easing of liquidity, Cheruvu said that liquidity would be sufficient when inflation comes down.

"Liquidity crunch will continue in the near-term and is likely to ease completely when inflation comes down to a comfortable level of around four percent," he said adding that the central bank is expected to continue with the open market operation to tide over liquidity deficit.

He, however, said MCX listing along with departmental expenditure by the central government are likely to ease the situation. Referring to movement of government bonds, he said that the downward trend was likely to continue in the near-term. Presently, the 10 year G-Sec is hovering in the range of 8.23-8.25 percent.

About expectation from the Budget 2012, he said that government should return to the path of fiscal consolidation with concrete steps to reduce the fiscal deficit in the upcoming budget. PTI