Mumbai: The Reserve Bank of India has announced a 50 basis point cut in the cash reserve ratio for banks – from 9.0 per cent to 8.5 per cent - beginning 11 October.

The reduction in the cash reserves that banks need to keep on their net demand and time liabilities (NDTL) would increase liquidity in the cash-starved market by a whopping Rs20,000 crore.

''On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the CRR from its current level of 9.0 per cent of net demand and time liabilities (NDTL) by 50 basis points to 8.5 per cent of NDTL with effect from the fortnight beginning 11 October, 2008,'' an RBI release said.

''As a result of this reduction in the CRR, an amount of about Rs20,000 crore would be released into the system. This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,'' the release added.

The RBI said it will review the CRR situation on a continuous basis.. The rate has been cut for the first time since June 2003.

The central bank had, on 16 September, had announced several measures to ease the pressure on domestic financial markets brought about by the bankruptcy of some of the world's top financial institutions.

Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks, the RBI said, adding, ''These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF.''

RBI said active liquidity management key to the current monetary policy stance and proposed to use a combination of instruments to cushion the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions.

''The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO), including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants,'' RBI said.

The overall stance of monetary policy in 2008-09 accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, as set out in the annual policy statement and reiterated in the first quarter review of July 2008. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations, the RBI release said.

The stock market regulator SEBI also announced measures to increase foreign fund inflow by removing the 40 per cent cap on the issuance of P-notes.