RBI may slash CRR to 3% at one go

mumbai: the reserve bank of india may explore a big bang approach to reduce statutory reserve requirements by bringing down the cash reserve ratio from 5.5 per cent to 3 per cent in one go. the possible option, aimed at expediting the development of financial markets, may be pursued if rbi's normal approach of reducing crr as and when opportunities arise takes a long time. stating this at a conference in chennai, rbi deputy governor y v reddy said the central bank is also considering a cap on bank borrowings in the call money market. besides, he said primary dealers should consider eliminating their access to the call money markets once the repo market develops. in future, rbi would substantially reduce refinance facilities, which would include discontinuing export refinance, to make the liquidity adjustment facility more effective. speaking at the 88th annual conference of the indian econometric society at madras school of economics, chennai, reddy said reducing the crr to 3 per cent was the most important unrealised medium-term objective of monetary policy reforms. he said that in the initial years of reforms, the rbi had envisaged a pre-announced time-table for reduction in crr. however, the time-table had to be abandoned to meet the eruption of global financial uncertainties and pressures on the foreign exchange markets. another approach — that of reducing the crr as and when opportunities arose — has been pursued by rbi till now. however, if it is felt that this approach takes a longer time and a compressed time-frame is desirable to expedite development of financial markets, it is possible to contemplate a package of measures in this regard, the deputy governor said. elaborating on the package, mr reddy said the crr reduction would have to be accompanies by several changes such as in the present way of maintaining cash balances by banks. with the information technology available with banks and with the operationalisation of the clearing corporation of india shortly and with the development of the repo market, it would be appropriate if crr is maintained on a daily basis. however, till banks adjust to such changes in the maintenance of crr, a minimum balance of 95 per cent of the required reserves on a daily basis may have to be maintained when crr is reduced to 3 per cent, reddy said. he said once clearing corporation is operationalised and there is a pure inter-bank money market, the effectiveness of the liquidity adjustment facility of the reserve bank will increase. the laf operations combined with judicious use of open market operations are expected to evolve into a principal operating procedure of monetary policy of rbi, he said. to this end, rbi would have to reduce liquidity through refinance as these would cause transmission losses of monetary policy.

RBI may slash CRR to 3% at one go

<img src=/photo.cms?msid=1343837827 align=left>MUMBAI: The Reserve Bank of India may explore a big bang approach to reduce statutory reserve requirements by bringing down the cash reserve ratio from 5.5 per cent to 3 per cent in one go.

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