Whenever RBI reviews Monetary Policy, some financial jargons hijack 1st page of all business newspapers and TV channels…Recent one, on last Friday as soon as I switched on TV, the top headline on all Business Channels was that RBI cuts CRR by 75 bps i.e. 0.75%. 1 bps equals to 0.01%….As a layman many people don’t even understand what it means and what will be its impact on common men…Last time RBI cuts CRR was in Jan’12 by 50 bps. This recent move is quite surprising.
In layman terms Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down & vice versa. RBI use this method (decrease of CRR rate), to infuse liquidity in the market by providing excess money to the banks for lending. The recent cut of 75 bps will infuse 48000 Cr in the system.
Now u must be wondering so what’s in it for me, if RBI has cut the CRR….Just to answer it’s a Good News for people who are planning to take loans in near future specially Home Loan….Just to give e.g. More the Liquidity in Market means Easy access to loans at Lower Interest Rates, It will increase Demand and thus High Inflation…Sounds bit confusing, it’s a cyclic process…let me explain, its like if banks have more money in treasury then they can’t keep it with them, to be profitable banks would like to lend this money immediately. High Liquidity will lower the interest rates as money supply is high & demand may not be high to match the supply….Once interest rates starts cooling off, the demand for Homes, Car etc will increase as people are getting cheaper credit & Loans become affordable…..Once demand will start increasing, the Inflation will go up….Therefore recent rate cut is reaction of RBI to decreasing inflation. Lower inflation means demand is decreasing which impact overall Growth of Economy so in order to increase demand, RBI needs to infuse Liquidity in system. Hope I have explained it in very simple terms.
Recently few nationalized banks have lowered Home Loan Rates but real fun will begin in few months from now when RBI will start decreasing REPO and Reverse REPO rates…Already analysts are anticipating further 50 bps CRR cut in RBI’s 15th March Monetary Review…Lower interest rates will bring fresh lease of life to Real Estate sector which is in Coma from quite some time…It will help in revival of most aspirational sector for Indians becoz every Indian has dream to build his own house and he spends his entire life in realizing this dream. Hope RBI will make it little bit easy for common men to realize their dreams fast in coming months.
Loan Borrowers especially Home Loan Borrowers can expect Good Times ahead and they will be the “King of Good Times” Not Kingfisher way :)
My 2 cents on this recent CRR cut, RBI always act in haste, when inflation was increasing RBI keep on increasing interest rates without analyzing whether its steps are influencing demand or not…Now when inflation has dropped over last few months again RBI is in hurry to infuse liquidity in system….Its seems, only job of RBI is to keep inflation in comfortable zone…Rather RBI should act as true central bank and monitor all key monetary parameters for overall growth of economy besides inflation, Rupee devaluation is one of them where RBI reacted only after situation went out of control. As per recent reports, the correct valuation of Rupee against 1 Dollar is 40 Rs but currently its devalued by 25%…RBI should immediately step in to control this rather being mute spectator.
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