India: RBI cuts CRR by 25 bps, repo rates unchanged

Monday, September 17, 2012

Mumbai: As it was expected, the Reserve Bank of India (RBI) on Monday left repo rates unchanged but cut the cash reserve ratio (CRR) by 25 basis points (bps), citing presently high inflation in India despite of the new monetary policy.

The CRR cut comes close on the heels of the government decision to take measures to boost growth and improve its fiscal position.

The RBI cut the CRR from 4.75 per cent to 4.50 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning September 22, 2012. Consequently, around ` 170 billion of primary liquidity will be injected into the banking system.

Keeping the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent RBI decided that the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

Immediately after the policy announcement, the rupee gained 1.1% to 53.715 to the dollar, having touched a high of 53.65 in the morning. India’s benchmark Sensex gained 0.91% to 18,631.99 points, while the yield on the 10-year bond dropped by 0.015 percentage point to 8.162%.

Inflation, as measured by the Wholesale Price Index, accelerated to 7.55% in August from 6.87% in July, much above the central bank’s comfort zone. Growth, on the other hand, has slowed to 5.5% in the April-June quarter, marginally higher than 5.3% in the previous quarter.

In April, the Reserve Bank implemented a frontloaded policy rate reduction of 50 basis points on the expectations of fiscal policy support for inflation management alongside supply-side initiatives for addressing the deceleration of investment and growth.

The Government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises. Further, steps taken to increase foreign direct investment (FDI) should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong.
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