What are the primary reasons behind the 50 basis points (bps) cut in the cash reserve ratio (CRR)?
The basic reason is the significant outflow of funds in recent weeks. There was a need to introduce liquidity into the system, and the quickest way to do so was through a CRR cut. Why is the banking system facing a liquidity crunch? Is it solely because of the outflow of foreign funds or are there other factors at play as well? The most important factor in the last few weeks is clearly the outflow of foreign funds. In addition, advance tax payments have led to money being sucked out of the system. That money will eventually come back into the system, but there is a mismatch at the moment. Oil companies are still buying forex in the spot market heavily to pay for their imports, because the oil bond arrangement has been suspended. This also adds to the pressure on the currency. Till recently, you had caps on external commercial borrowings. But now even for companies that normally could have borrowed and brought money in, borrowing has become difficult because of the liquidity constraints
