RBI cuts CRR

The Reserve Bank of India (RBI) joined the government to add momentum to growth by cutting the cash reserve ratio (CRR) by 25 basis points.
CRR is the portion of deposits and advances that banks must park with RBI.
The move will immediately inject Rs 17,000 crore into the banking system. Banks are expected to respond by lowering their base rates (the floor price below which they cannot lend).
This usually translates into a drop in the overall interest rates in the system, helping industrial activity and investments to pick up. The CRR cut to 4.50 per cent will infuse Rs 17,000 crore into the banking system. Since January, RBI has cut CRR by a total of 150 basis points, infusing Rs 1,02,000 crore into the system.
Banks say a revision in the base rate may follow.
Banks are already sitting on excess liquidity due to poor credit growth. While this is a negative carry for them, the CRR cut will add to this liquidity, and force many banks to drop their base rates.
RBI holds that it wants to see monetary transmission take place through the base rate rather than selective product reductions. With the latest move from RBI banks may be under pressure to do exactly that.
While CRR is a liquidity tool and not so much a monetary tool, RBI's move is a clear signal for banks to cut lending rates.
The cuts in most rates like those on certificates of deposits, retail fixed deposits and bulk deposits and CRR will bring down banks' cost of funds. With commercial paper rates also down, the banking system is missing out on a lot of short-term opportunities, which are getting diverted to the debt market.