"This reduction (in CRR from 5.5 per cent to 4.75 per cent) will inject around Rs 48,000 crore of primary liquidity into the banking system," the Reserve Bank of India (RBI) said in a statement.
The reduction in cash reserve ratio (CRR) will come into effect from tomorrow, it said, adding that the measure is aimed at reducing "the liquidity deficit (which) is expected to increase significantly during the second week of March on account of to advance tax outflows and the usual frontloading of cash balances by banks with the Reserve Bank."
The last date for advance tax payment in March 15 and is estimated to drain out Rs 60,000 crore from the system.
RBI had last reduced CRR by 0.5 percentage points on January 24 thereby injecting Rs 32,000 crore into the cash-strapped system. With the latest decision, the RBI would be injecting around Rs 80,000 crore into the economy in less than 40 days.
Besides, the Reserve Bank continued with the open market operations (OMOs), injecting primary liquidity of over Rs 1.24 lakh this financial year so far. Of this, Rs 52,800 crore was injected after the third quarter review in January, it said.
Tight liquidity situation has compelled banks to draw heavily from the central bank. The average borrowing from the RBI was over Rs 1 lakh crore in the past few days.
The net average borrowing under the Reserve Bank`s liquidity adjustment facility (LAF) rising from an average of Rs 1.29 lakh crore in January to Rs 1.40 lakh crore in February, the central bank statement said.
Net injection of liquidity through LAF rose to a peak of Rs 1.91 lakh crore on March 1, 2012, though subsequently it declined to Rs 1.27 lakh crore on March 7, 2012, it added.
"Thus, the overall deficit in the system persists above the comfort level of the Reserve Bank," it said.
Accordingly, it has been decided to inject permanent primary liquidity into the system by reducing the CRR so as to ensure smooth flow of credit to productive sectors of the economy, it said.
RBI has announced reduction in CRR a week ahead of its scheduled mid-quarterly review of monetary policy on March 15.
Reacting to the RBI`s decision to cut CRR, bankers said, it will not immediately result in reduction in interest rates. "Change in the deposit rates will be done on the basis of demand for money... I do not think there will be any immediate reaction on this neither on the deposit nor on the advances front," Bank of Baroda Chairman and Managing Director M D Mallya said.
According to Canara Bank Chairman and Managing Director S Raman, this infusion would bring in around Rs 2,500 crore to the bank`s kitty. "We will have to look into various things before deciding on the rate cut," Raman said.