In a surprise move, the Reserve Bank of India has cut the Cash Reserve Ratio (CRR) by 25 basis points (0.25 %). It will free up Rs 17,000 crore more with the banks for lending. In the backdrop of some big bang reforms, the RBI has reduced the CRR from 4.75 % to 4.5%. The cut would be effective from September 22. Cash Reserve Ratio is that part of the bank’s total deposits, which it keeps with the RBI in cash. The latest step is expected to pep up the investment and stock market sentiment, given that the corporate India direly needs it in the backdrop of an investment slowdown.
However, the Repo Rate (the rate of interest at which the banks borrow from the RBI) remains unchanged at 8 % as the apex bank continues to target inflation, which shows no signs of cooling down. Consequently, there has been no change in the reverse repo rate too. The reverse repo, at which the RBI absorbs excess liquidity through borrowings from banks, remains at 7%.
Also, with interest rates remaining the same (as on date), the EMIs on loans remain unchanged. The decrease in CRR is likely to lead to progressively lower lending rates, which will improve investments and help growth.