Macroeconomics

The Bank decided to further reduce the SRR and thereby to inject more liquidity to the banking system.

Positive Effects:

1. It is expected that this action would lead to releasing around Rs. 17 billion to the banking system.

2.The Central Bank anticipates that this move will not only ease the liquidity pressure but also will help to bring down interest rates and costs of funds.

3. The immediate effect of a reduction in the SRR is the release of funds that commercial banks can use for lending purposes that would otherwise be idling in the Central Bank as required reserves without earning any interest.

4. A reduction in the SRR also influences the money multiplier, which in fact is the amount of deposits or loans that the banking system can create from excess reserves. A reduction in the SRR leads to an increase in the money multiplier and in turn, the lending capacity of banks.

5. When the Federal Reserve lowers the reserve ratio, it lowers the amount of cash banks are required to hold in reserves and allows them to make more loans to consumers and businesses.

6.This increases the money supply and expands the economy but also works to increase inflation.

7. The inflationary pressures arising from the increased money supply will also have adverse effects on the export competitiveness further widening the trade deficit. This would call for a depreciation of the money.

8.Inflationary pressures emanating from these underlying forces are likely to negate the expected reduction in interest rates as well.