Reserve Bank of India has been cutting Cash Reserve Ratio (CRR) by 250 bps to 6.5% from 9% a week ago. Such a type of move by the RBI is commendable indeed, however these moves are temporarily to boost liquidity which is dried up due to massive outflow from the country. Inter bank Call rates jumped to 20% even London Inter Bank Offer Rate (LIBOR) has also jumped to over 6% from 2% a month ago due liquidity conditons. Banks are even scaring to lend each other.
The recent CRR cut would release up to Rs. 60,000.00 crores in the Financial System and banks will get their reserves back so that they can meet their requirements, however the RBI shall roll back its decision any time soon when the liquidity situation improves to regular check on inflation which is already in double digit for the last 3 months.