Central Bank of India(RBI)cuts bank reserve requirement to 7.5 pct

The Reserve Bank of India (RBI) announced a deeper cut than planned in banks' cash reserve requirements on Friday in a move expected to give it more room for intervention to check a rapid slide in the rupee.

The RBI said it would cut the cash reserve ratio (CRR) to 7.5 percent of the deposits held by banks from 9.0 percent, instead of to 8.5 percent as previously announced. The move takes effect on Saturday.

The action will release a total of about 600 billion rupees ($12.2 billion) into the banking system, easing cash conditions in the money market which have tightened due to RBI buying of rupees.

"(The CRR cut) will help intervention. The more they intervene the more they suck rupees off the system. So if you are cutting CRR, you are offsetting that," said Abheek Barua, chief economist at HDFC Bank.

"This is a short-term reaction to a huge panic crisis and a possibility of a run in the rupee. I think they (the RBI) will try their best to prevent the rupee breaching 50 per dollar," Barua said.

The rupee hit a record low of 49.30 per dollar on Friday, pressured by foreign fund outflows from the falling stock market amid the global financial crisis.

Cash has also been tight for nearly a month due to a large government borrowing programme and high credit growth, which is growing at 26 percent annually, well above the RBI’s target of 20 percent.

The overnight cash rate hit a high of 23 percent on Friday, its highest in more than 19 months.

"The Reserve Bank of India is monitoring developments closely and continuously and would respond swiftly and even preemptively to any adverse external development impinging on domestic financial stability, price stability and inflation expectations, and the continuation of growth momentum of the Indian economy," the RBI said.