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RBI aims to bring CRR down to three percent

The Reserve Bank of India aims in the medium term to lower banks' cash reserve ratio to the statutory minimum three per cent of net liabilities, deputy governor Y V Reddy said on Tuesday.

Reddy said the central bank might consider a package of measures announcing a one-time reduction in the CRR to three per cent, to expedite development of markets, accompanied by changes in the way the reserves are maintained.

"Among the unrealised medium-term objectives of reforms in monetary policy, the most important is reduction in the prescribed CRR for banks to its statutory minimum of three per cent," Reddy said in a lecture.

He said once the Clearing Corporation of India is made operational and the repo market develops, banks could maintain CRR on a daily basis.

But till they adjusted to the changes, banks may be required to maintain 95 per cent of the required balance on a daily basis when the CRR is reduced to three per cent.

The CRR was reduced in the RBI's October monetary policy review in two stages to 5.5 per cent.

Reddy said after the government repos market develops, primary dealers should consider eliminating their access to the call money market.

"There is an opinion that such restrictions of access to call money in the Indian conditions would add to stability in financial markets and help develop a term money market," Reddy said.

Reddy said banks should use the call money window to iron out temporary mismatches in liquidity and not use it as a sustained source of funding their normal requirements.

He said a limit for raising resources from the call money market by banks could be set.

The deputy governor said refinance facilities to banks and primary dealers should also be reduced in order to make the conduct of monetary policy, through repos under the Liquidity Adjustment Facility and open market operations more effective.

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