Interest rate reduction of 25 basis points comes into force today

The Reserve Bank of India (RBI) has announced plans to release approximately Rs 60,000-70,000 crore into the banking system, as part of a four-phase process. This move is aimed at maintaining sufficient liquidity in the financial system.

In June, the RBI decided to cut the Cash Reserve Ratio (CRR) by 100 bps, releasing primary liquidity of about Rs 2.5 lakh crore into the banking system by December. The first cut in the CRR will occur on Saturday. Since June 27, the RBI has taken out Rs 20.37 lakh crore through these auctions.

The average domestic term deposit rate has seen a decrease from 5.75% to 5.61% in July. This moderation in the weighted average domestic term deposit rate is a result of the RBI's actions to provide additional liquidity to the banking system.

The RBI has not specified where the additional money received by banks will be placed. Banks are considering various options for investing the additional money they have received, with the treasury head at a private sector bank stating that the placement of additional money would depend on liquidity and instruments providing better yields.

The CRR cut provides the RBI with the ability to manage liquidity without affecting other segments and keeps rates in check. Banks are not expected to change deposit rates due to the additional liquidity inflow.

Sector experts are discussing where to park the additional money received by banks. Alok Singh, treasury head at CSB Bank, stated that the CRR cut coincides with the busy season, reducing liquidity stress during the December-March period. The average liquidity for the past one month was approximately Rs 2.75 lakh crore in surplus.

The RBI has been absorbing additional liquidity through variable rate reverse repo auctions. On Thursday, the liquidity figure stood at Rs 2.87 lakh crore.

Meanwhile, engineering exports to the US are projected to face an $8-billion hit from tariff hikes. This development underscores the importance of the RBI's efforts to maintain a stable financial system amidst global economic uncertainties.

The RBI has not yet disclosed specific plans for the additional liquidity in the banking system. However, the bank's actions so far indicate a commitment to ensuring the smooth functioning of the financial system and supporting economic growth.