CRR cut by RBI – 60000 Cores Back in System

By | October 10, 2008 4:37 pm

Reserve Bank of India (RBI) with a view to inject liquidity in the system has proposed another CRR cut of 100 basis point (bps) in addition to 50 bps made last week. Aggregate cut of 150 bps in CRR, would inject a liquidity of Rs.60,000 crores in the banking systems. Against borrowings of upto Rs.90,000 crores by the banks, currently from RBI, this liquidity injection in the system would come as a big relief for the banking sector in the country.

However, this liquidity may not see or give any big relief to Auto or Housing Sector but may encourage the bankers to atleast release the drawing powers to industries, which were put on hold or have been freezed by them. This would lubricate the liquidity crunch now being faced by the industries like Automobiles, Metals, Auto Ancillaries and Chemical Industry.

The cut in CRR has become necessary for RBI as they have no other option to infuse liquidity in the System Cut in Repo rate cannot be expected from RBI at this stage in view of inflation still hovering close to 12 per cent. If we do not see a significant improvement in the liquidity in the system, a further 50 bps cut in CRR is not ruled out. Cut in Repo rate would come only in January 09.

With a view to stabilize the rupee, RBI has been selling dollars in the market, which has sucked out liquidity in the system, with rupee having depreciated by about 20 per cent in the last four months, the demand for dollar remained at the higher levels, by the importers and oil marketing companies, as currency weakness has neutralized the effect of falling commodity prices.

Though other countries have been going in for rate cut, Indian Banking Regulator – RBI, still has its focus set on price stability and control of inflation, as they have target to bring it down, to single digit by end of January 09. This objective would get achieved if the rupee stops depreciating beyond a point and may even settle at Rs.48 a dollar. Once the outflow by FIIs also tapers off from the Indian stock markets, the relief to rupee may come and this may help it to settle at around 48 and may not find it touching 50 levels.

Due to weak rupee, we have started witnessing good NRI Deposits to our commercial banks.

In the current situation of turmoil, nothing much is expected from SEBI as short selling ban would not help at this stage. Even nothing much can be expected from Finance Ministry or by the government as any ad-hoc relief in the form of sector – specific reliefs or reduction in indirect taxes to any one sector may create dissatisfaction amongst the other sectors or industries not receiving it.

However, on long term basis lot of policy review and changes are required in terms of fiscal management, FDI and FII Inflow rules, hike in FDI limits in various sectors, subsidy disbursement policy for fertiliser and oil sector as also bringing in pricing norms for primary markets to protect the interests of small investors etc.

However, with global markets seems to have reached at its bottom in view of whatever worst had to come having been surfaced, we should see our markets now settling at its bottom, which could be held at the levels of 10K for Sensex and at 3K for Nifty. Though one may not be in a position to take a call when we would start recovering but even if we remain settled at these levels for about 4 weeks and taking cues form Q2 results, we can expect value based buying coming in from our domestic investors in a small way post Diwali.

In the present time of crisis, this CRR cut of 100 bps (with earlier cut of 50 bps and now at 150 bps cut) by RBI would give a relief and this move needs to be praised.

Category: Daily

About Bramesh

Bramesh Bhandari has been actively trading the Indian Stock Markets since over 15+ Years. His primary strategies are his interpretations and applications of Gann And Astro Methodologies developed over the past decade.

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