Reserve Bank reduces cash reserve ratio to 8.5 percent

New Delhi, Oct 6 (IANS) The Reserve Bank of India (RBI) Monday reduced the cash reserve ratio by 50 basis points to 8.5 percent, bringing cheer to financial circles.

The central bank said the decision was taken after a "review of current liquidity situation in the context of global and domestic developments".

The change will be come into effect Oct 11.

According to the RBI's statement, this measure will lead to an injection of about Rs.20,000 crore (Rs.200 billion) into the financial system.

"This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions," said the statement.

RBI had Sep 16 announced certain measures to reduce the pressure on domestic markets as a result of a fallout of global financial turmoil.

"Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained," RBI said.

Further, it said, with central banks across the world tightening liquidity controls, the domestic money and foreign exchange market have responded with "marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the Liquidity Adjustment Facility (LAF)".

"Active liquidity management is a key element of the current monetary policy stance," RBI added in its statement.

Welcoming the move, HDFC Bank chairman Deepak Parekh said it was 'very timely and absolutely necessary'.

'At least, it's a beginning, we need liquidity and RBI has responded positively,' he said.