RBI cuts CRR by 150 bps

In an anticipated move, the Reserve Bank of India, or RBI, has cut the cash reserve ratio, or CRR, by 150 basis points to 7.5% with effect from tomorrow in a bid to infuse liquidity into the markets.

On October 6, the RBI had cut the CRR by 50 bps to 8.5%. Today's 150-bps cut includes October 11's cut. The cut will inject liquidity into the system to the tune of Rs 60,000 crore.

Nilesh Shah of Envision Capital said, “The CRR cut is definitely a positive move, which is going to soothe some liquidity fears. The stock market also needs liquidity and this (the rate cut) will help to some extent. Whether this is going to help us beyond a day or beyond an intra-day basis is something that remains to be seen.”

“Directionally, the CRR cut is a positive move that helps the banking system, helps the overall economy and will probably help the market in short-term or intra-day,” Shah added.

The announcement came close on the heels of a sharp fall of over 1,000 points on the Sensex on Friday morning amid cues from falling global markets. Soon after the announcement, the Sensex recovered a bit, before falling again later.

Udayan Mukherjee, Managing Editor, CNBC-TV18, said, “The announcement will get gobbled up, or maybe prompt or induce a bit of short covering with the market going up.”

Mukherjee said that it was a welcome move but added he didn’t see it affecting the stock market substantially. “Of course, it aids the money market and injects a bit of liquidity to the system — 150 bps is a fairly meaningful chunk of money coming in,” he said, adding that from a stock-market perspective, the cut would produce some kind of positive sentiment for a short while, "but the problems of the stock market are different."

Finance Minister P Chidambaram also issued a statement on the CRR cut and welcomed the RBI's decision.

source: http://www.moneycontrol.com