- Move is estimated to release Rs.200bn in liquidity to money markets
- Monetary Board expects move to quicken monetary policy transmission
- Says SRR cut helps reduce banks’ cost of funds and thereby market lending rates
Continuing its efforts to enhance monetary policy accommodation, the Monetary Board of the Central bank yesterday announced plans to cut the banks’ mandatory reserve requirement by 200 basis points.
The move, which came as a surprise, is estimated to release around Rs.200 billion in liquidity into the money market and thereby accelerate the reduction in the lending rates in the economy.
As of yesterday, the money market was in deficit of Rs.178.93 billion.
At a meeting held on Monday, ahead of the scheduled Monetary Policy meeting later this month, the Monetary Board had decided to reduce the Statutory Reserve Ratio (SRR) of the licensed commercial banks (LCBs) from the current 4.00 percent to 2.00 percent, effective from the reserve maintenance period commencing from August 16.
The Central Bank in a statement said it would “enable further downward adjustment in the market lending rates as a result of the reduction in cost of funds of the LCBs, thereby supporting the expansion of credit flows to the economy”.
The Central Bank had expressed its dissatisfaction over the pass-through of the last two policy rate cuts by the banks to the customers and said it was assessing options to expedite the process.
The Central Bank Governor recently said the monetary policy transmission remains incomplete.
“While the LCBs are expected to pass the benefit of the SRR reduction to their customers without delay, the Central Bank will continue to monitor market developments and take appropriate administrative measures, if required, to ensure faster reduction of market lending rates,” the statement noted.
The SRR is another tool, in addition to the key policy interest rates, the Central Bank has in its arsenal to influence the trajectory of the monetary policy and thereby the interest rates in the economy.
The SRR is the amount the banks are required to keep aside from their deposits with the Central Bank for liquidity purposes. However, this reserved amount does not generate a return.
Hence, from the period commencing from August 16, the banks are required to set aside only 2 percent of their deposits as the SRR, in addition to another 20 percent in government securities as mandatory Statutory Liquid Assets.
There is widespread expectation for the Monetary Board to follow through with another policy rate cut at its next meeting scheduled for August 24.
Policy rates were slashed by cumulative 450 basis points in June and July, as official inflation retreated to single-digit levels faster than expected, after hitting almost 70 percent in September, last year.
