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RBI pumps liquidity in economy

Taking a cautious stance on Monday, the Reserve Bank of India [RBI] cut cash reserve ratio [CRR] by 0.25 per cent – the percentage of deposits banks keep with the central bank – but refrained from reducing lending rates in view high inflation.

The RBI decision, which comes days after a slew of measures taken by the government to push growth, will release Rs 17,000 crore of primary liquidity into the system. The liquidity infusion, the RBI said, would ensure adequate flow of credit to productive sectors of the economy.

Following the cut, CRR will come down to 4.5 per cent while the repo rate, at which the central bank lends to the banks, would remain unchanged at eight per cent. The reverse repo, at which it absorbs excess liquidity through borrowings from banks, remains at seven per cent. 'As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations,' the RBI governor D Subbarao said while announcing the mid-quarter review of the monetary policy.

The wholesale price-based inflation for August moved up to 7.55 per cent from 6.87 per cent in the previous month.

The RBI said the CRR cut would be effective from 22 September. The moderation in CRR rate is likely to goad banks to bring down their lending rates.
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