The tight liquidity conditions which were prevailing for long will surely easy out. The move will help boost the economy and robust the structural deficit in the system by infusing permanent primary liquidity.
With the easing of inflation and CRR reduction, the garment sector hopes to get credit at lower interest. The RBI has, by this announcement, addressed both demand and supply constrains.
According to A Sakthivel, AEPC chairman, based on an assessment of the current macroeconomic situation, the RBI decided to reduce the policy repo rate from 8% to 7.75%. Consequent to this, the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 6.75%. Similarly, the marginal standing facility rate, determined with a spread of 100 basis points above the repo rate, as well as the bank rate stand adjusted to 8.75%. These changes have come into effect immediately after the announcement.
According to an official from TEA, the industry was actually expecting a reduction of 50 basis points as the interest rate cut would largely help Tirupur knitwear exporting units, which are currently under financial pressure because of various issues. It is expected that all banks would come forward to reduce their base rates to support the survival and growth of the industry.
The RBI has also decided to reduce the CRR of scheduled banks from 4.25% to 4% of their net demand and time liabilities, effective the fortnight beginning February 9. This reduction in CRR will inject liquidity of around R18,000 crore into the banking system, the official said.