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CRR cut hinges on markets, says RBI

The Reserve Bank of India said on Wednesday that it remained committed to reducing banks' cash reserve ratio from 8.5 per cent but this would depend on both domestic and external market conditions.

"Why not even more...," the Reserve Bank of India's Deputy Governor Y V Reddy said, responding to a suggestion that the cash reserve ratio (CRR) be cut to 3 per cent.

"We have given a commitment to reduce the CRR as soon as possible but it would depend on the pace of fiscal adjustment and the condition of global and domestic financial markets," he told a conference of bank economists.

He later told reporters the central bank had written to the government to amend legislation which sets a minimum CRR of 3 per cent and a minimum statutory liquidity ratio (SLR) of 25 per cent.

The SLR defines the amount banks need to invest in approved securities.

"Our idea is that the minimum of three percent of CRR and 25 per cent of SLR is rather high by international standards and that has to be changed and greater flexibility provided to the central bank to change this up or down," he said.

Need flexibility

"We have proposed that we should have flexibility as far as SLR is concerned," Reddy said.

"...the type of implicit taxes on the banking system through reserve ratios will have to be reviewed and that is one we have suggested in the amendment," he added, referring to changes already suggested by the central bank to existing legislation.

Reddy said that the government was considering the central bank's suggestions.

Reddy was non-committal when asked about chances of a rate cut which Indian financial markets have been speculating about since the US Federal Reserve eased rates earlier this month.

"I am not favouring anything but the factor is there," he said, referring to the level of core inflation.

He said he had nothing further to add to comments made on Monday by RBI Governor Bimal Jalan who said the current level of core inflation, at 3.4 per cent, was comfortable and that the interest rate environment was positive.

Core inflation is reflected in the prices of manufactured and primary products.

Headline inflation, measured by the wholesale price index, has been rising steadily over the past few months and grew 8.16 per cent year-on-year in the week ended December 30.

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