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Press Release
Issued By
Date
Economic Research Department
25-11-2008
Central Bank Further Reduces Statutory Reserve Requirement (SRR)
The shortage of liquid dollar balances in international financial markets arising
from the ongoing global financial crisis and the higher demand for domestic funds have
caused a prolonged liquidity shortfall in the domestic financial markets. The Central Bank
has closely monitored these market developments and thus taken various measures to
address the liquidity constraints, but a deficit continued in the market, thereby disturbing
the smooth functioning of the banking system. In order to address these adverse
consequences, the Central Bank reduced the SRR on rupee deposit liabilities of
commercial banks by 75 basis points to 9.25 per cent on 17 October, 2008. In addition to
this, the Central Bank has also been injecting additional liquidity by way of providing
reverse repo facilities to commercial banks and primary dealers.
Notwithstanding these measures, a deficit in market liquidity still persists and
therefore, the Central Bank has now decided to further reduce the SRR applicable to rupee
deposit liabilities of commercial banks and thereby to inject further liquidity to the
banking system. Accordingly, the Central Bank has decided to reduce the SRR further by
150 basis points to 7.75 per cent from its current rate of 9.25 per cent with effect from the
reserve week commencing 28 November 2008. This move is expected to release around
Rs. 17 billion to the market, which would help ease the liquidity deficit and upward
pressure on market interest rates. Further, this move is expected to reduce the interest rate
spread of commercial banks, thus enabling them to lend at lower and more desirable rates
as well. It is also expected that by addressing the liquidity shortfall in the market, the cost
of funds of the private sector would decrease and that would facilitate the smooth
functioning of economic activities.
It should also be noted that since inflation is already on a decelerating trend at a
faster rate than expected, this measure is not expected to pose any threat to the inflation
outlook.