After infusing Rs 1,85,000-crore liquidity into the banking system, the RBI on Saturday effected yet another 100 basis points cut in cash reserve ratio (CRR) and a 0.5 per cent reduction in key short-term lending (repo) rate, signaling softening of interest rates to prop up growth.

The one percentage point cut in CRR, the amount which banks have to park with the apex bank, has been brought down to 5.5 per cent to infuse additional liquidity of Rs 40,000 crore into the system.

The CRR cut will be in two tranches and the first one of 0.5 per cent will be effective retrospectively from October 25 and the second from November 8.

The RBI also cut the repo rate, the rate at which it lends to banks, by 0.5 per cent to 7.5 per cent with effect from November 3.

The central bank has also reduced the statutory liquidity ratio (SLR), the amount which banks are mandated to park in government securities, by 100 basis points to 24 per cent.

Welcoming the decision, ICICI Bank Joint Managing Director Chanda Kochhar said, "it will release much needed liquidity into the system and signal reduction in interest rates."

The SLR cut would inject about Rs 40,000 crore into the banking system.
To provide further comfort on liquidity and to impart flexibility in liquidity management to banks, the Central Bank has introduced a special refinance facility to scheduled commercial banks.

Under this facility, the banks will be able to borrow short-term funds from Reserve Bank up to a maximum period of 90 days. 
           

The RBI also said that it would continue to sell foreign exchange (US dollars) through agent banks to augment supply in the domestic foreign exchange market or intervenes directly to meet any demand-supply gaps.
            

"The Reserve Bank would either sell the foreign exchange directly or advise the bank concerned to buy it in the market.
             

All transactions by the Reserve Bank will be at prevailing market rates and as per market practice," the apex bank said.
             

The apex bank, has also, "as a temporary measure" decided to permit systemically important non-deposit-taking non-banking financial companies (NBFCs-ND-SI) to raise short-term foreign currency borrowings under the approval route.
             

This is, however, subject to their complying with the prudential norms on capital adequacy and exposure norms, it said.
             

It has also decided to conduct buy-back of market stabilisation scheme (MSS) dated securities so as to provide another avenue for injecting liquidity of a more durable nature into the system.
            

Earlier, under the MSS, government securities had been issued to sterilise the expansionary effects of forex inflows.
            

But now, with considerable forex outflows, it has been decided to conduct buy-back of MSS dated securities, the RBI said.
           

This would be calibrated with the market-borrowing programme of the government and the securities proposed to be bought back and the timing and modalities of these operations would be notified separately, the RBI said.