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RBI cuts CRR by 50 basis points

May 12, 2001

The Reserve Bank of India (RBI) today announced a 50 basis points cut in the cash reserve ratio (CRR) for banks to 7.5%. However, the bank rate (7.5%) has remained unchanged. This cut in the rates shall be effective from the two-week period beginning May 19. The RBI indicated that the CRR cut would release about Rs 45 bn to the banking system. The lower cash reserve ratio indicates good signal for the banking companies. They can now deploy these additional funds to park in investments earning higher interest rates (interest rate on CRR is a marginal 4%).

The RBIís move is in line with the lower interest rate scenario globally. Recently European Central Bank also reduced interest rates by 25 basis points to 4.5%. The US Federal Reserve is also expected to cut rates in its policy meeting on May 15, 2001.

The RBIís decision came after reports indicating the decline in the Index of Industrial Production (IIP) in the month of March. The IIP in the March 2001 grew by just 1.3% as against 8.3% in the corresponding period during the previous year.

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