What's in store post the RBI review?

The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai November 2, 2010.

On January 24, the RBI reduced the CRR rate by 0.5 percent. The revised CRR now stands at 5.5 percent which was earlier 6 percent which would be effective from January 28th 2012. What does this mean for the banks, economy and the common man?

BANKS

CRR refers to the Cash Reserve Ratio that the banks have to maintain with the Reserve Bank of India (RBI). It is the minimum reserve that each bank must hold with the RBI out of customer deposits. A cut in CRR would definitely be advantageous to the banks as they would have more funds to lend/invest for profit generation. RBI also foresees a threat in the form of increase in bad debts/non-performing assets (NPA's) due to this move.

ECONOMY

Till now RBI had been resorting to OMO or open market operation whereby it has bought back 70,000 crore rupees worth of government securities from the market in the recent past. As of now inflation is projected at 7 percent by March end. The CRR cut has facilitated an injection of 32,000 crore rupees into the economy, which will soften the interest rates considerably. The RBI lowered its GDP growth forecast for FY13 to 7 percent from 7.6 percent, and left its wholesale price index inflation target unchanged at 7 percent. However, the RBI opted to keep the repo rate (repurchase rate or short term lending rate), at which it lends to the banks, unchanged at 8.5 percent, keeping in mind the downtrend in global economy as well as slowdown in domestic economy. Reverse repo (rate at which the RBI borrows from banks) is also kept at 7.5 percent.

IMPACT ON THE COMMON MAN

Banks will have more money in their hands to lend to the common man. There is no current change in interest rates but one can hope for lower rates in future. There is no immediate relief from the EMIs for the home and auto loan borrowers, but rate reduction is definitely on the cards. Inflationary pressures remain, but there are hopes that prices will ease during the next fiscal year which starts in April.

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