Monetary policy is most effective when it is unanticipated, and the Reserve Bank of India’s (RBI’s) decision to cut the cash reserve ratio, or CRR, for banks by 75 basis points on Friday was indeed unexpected. This is a pleasant change, for the central bank has in recent times chosen to focus on its regular schedule of reviews instead of responding to the needs of the market more spontaneously. This cut was welcome not just for its well-planned timing, but also for its relative size; the RBI has, too often, moved with baby steps when strides are called for. Now, by cutting CRR by 75 basis points to 4.75 per cent, Mint Road has acknowledged that there is something very wrong with the degree of liquidity in the system.........
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