The Parliament on Wednesday afforded the Reserve Bank of India the flexibility to fix the cash reserve ratio of banks.
Act amended; floor, cap on ratio goes.
MUMBAI: The Parliament on Wednesday afforded the Reserve Bank of India (RBI) the flexibility to fix the cash reserve ratio (CRR) of banks.
The Parliament on Wednesday approved changes to the Reserve Bank of India Act, 1934 to facilitate this.
By amending the act, India removed the limits for banks' cash reserve ratio requirements and give the central bank flexibility to set the limits, the amendment to the bill said.
A bond market analyst told DNA Money the move will have no impact. "The medium-term policy of the Reserve Bank of India (RBI) is to bring down the CRR to below 3%. The market will not see any immediate reaction," he said.
But what the money market is awaiting is the passage of the Bill to remove the statutory liquidity ratio (SLR) cap.
"If that is done, the liquidity situation would ease considerably. If the Centre has to borrow excessively and there's no liquidity, bringing down the SLR ceiling would help. But this could have a negative impact on bonds as the appetite for the instruments among banks will diminish," the analyst said.
Banks at present have to keep 5% of their deposits in cash, or the cash reserve ratio, with the RBI. The act doesn't permit the cash reserve ratio to go below 3% of deposits.
Moving the amendments, finance minister P Chidambaram (pictured) said the changes in the Act would arm the central bank with more powers and instruments to keep a tab on the rapidly expanding financial sector.
The amendments mean that the floor and cap on cash reserve ratio have been removed.
A 1% cut in cash reserve ratio will release around Rs 20,000 crore into the banking system.
"The volatility in the influx of foreign exchange and the market conditions in a fast-changing economy, can be expected to continue as the financial sector makes more progress," Chidambaram told Parliament. "For effective conduct of monetary policy, there is need to enable Reserve Bank of India to determine the cash reserve ratio for scheduled banks without any floor or ceiling."
The amendments also change the definition of repo and reverse repo, in line with international usage and RBI's definition. Previously, the reverse repo rate was the rate at which the RBI infused liquidity, while repo rate was the rate at which central bank drained out liquidity.
However, since last year, RBI has reversed the definition.
Currently, reverse repo rate is 5.5%, while repo rate is 6.5%.
The amendments also empower the central bank to issue directions to any agency dealing in different contracts in gilts, money market instruments and derivatives. The bill now has to be approved by the Rajya Sabha.
(With agencies)
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