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Loans such as home and others that are given to businesses and individuals are about to become cheaper with RBI releasing INR 32000 crore to banks via a half percentage point reduction in the CRR or Cash Reserve Ratio. It is step is mainly aimed to give a push to growth. CRR relates to the amount of deposits that all the commercial banks have to necessarily maintain with the RBI, was reduced from 6% to 5.5% on Tuesday, 24th January 2012. This is the first reduction in CRR that is made by RBI after January 2009 when released funds in order to move the demand that was affected due to the crisis of Lehman Brothers.

Some bankers had said that the already the interest rates have fallen and it is matter of time that the lending rates also fall. The chairman of SBI, India’s largest lender, Pratip Chaudhari, was found saying the rates on loans would come down for some sectors where high growth is expected along with small delinquencies.

Conversely, the banks might be guarded about the reduction of the deposit rates since are many tax-free schemes are there that offer returns ranging from 8.3% to 8.5%. The injection of liquidity in the market by the cut in CRR from RBI comes when banks see a slowdown on their credit giving ability and have specified to the central bank that the real growth would be around only 16% when compared to the target of 18%.

Mr. Chaudhari also said that he expects the rates to further fall down by 150 basis points in total by the end of FY 2012-13 since they cannot be reduced immediately. This move by the RBI was celebrated in the market with Sensex also crossing the 17K level mark in its intraday trade and the Indian rupee appreciating with respect to US Dollar and coming below Rs50 per dollar. After the announcement of the Reduction in CRR, the Governor of RBI, D Subbarao also he took this step because of the falling growth rate and increasing level of inflation in the economy. The central bank eased the liquidity because of structural shortfall that forced the banks to from RBI in the month of January.

Adding to this, the growth forecast of the RBI was also brought down to 7% from its previous forecast of 7.6%. The reason behind this fall in growth was due to domestic as well as global factors along with the delayed reaction of the RBI towards rate hikes. The cut in the Cash Reserve Ratio is a positive sign of development for all commercial banks that can now earn interest income of nearly 3000 Crore Rupees on funds that were up till now reserved with the RBI. For example, the State Bank of India that has deposits of 9.7 Lakh rupees , will see its funds that can be lended to rise up by approximately Rs 5000 crores. Considering that the bank can earn nearly 8.5% by simply lending back the money to RBI, it could see that its profits would rise to over Rs 400 crore if the lending rates are not cut.

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