Moneycontrol Bureau
The Reserve Bank of India on Tuesday left its key policy rate unchanged in its second quarter (July-September) monetary policy. However, it cut cash reserve ratio (CRR) by 25 basis points to 4.25%. CRR is the portion of deposits banks are mandated to keep with the RBI.
With the CRR cut, the central bank will infuse Rs 17,500 crore liquidity into the system. Repo, the policy rate at which banks borrow money from the regulator remains at 8% while reverse repo, used to lend money to RBI is at 7%.
"The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth," D. Subbarao, the governor of RBI said in a statement.
The central bank also revised its growth outlook for 2012-13. RBI estimated GDP growth at 5.8% as against 6.5% earlier. At the same time, it upped the headline inflation projection to 7.5% compared with 7% indicated in July. RBI expects it to rise somewhat in October-December before beginning to ease in Jan-March.
An appreciating rupee too is likely contain inflation by reducing the cost of imports especially of commodities.
"While prospects for agriculture appear resilient, the overall outlook for economic activity remains subdued. Looking ahead, the path of inflation will be shaped by two sets of counteracting forces. On the downside, slower growth and excess capacity in some sectors will help moderate core inflation. Stable, or in the best case scenario, declining commodity prices will reinforce this tendency," the governor said.
RBI observes that projected inflation which indicates a rise till December before it eases in the December quarter are bearing certain risk elements. With this, it apparently pinned hopes of any policy rate cut before the fourth quarter (Jan-March).
"While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic," Subbarao said.
In order to ensure availability of funds, RBI slashed CRR by 175 bps so far in 2012. In July-September quarter, banks net borrowings through RBI window (read Liquidity Adjustment Facility) were at Rs 48,600 crore. That was within the range of RBI's comfort zone i.e. 1% of net demand and time liabilities.
However, liquidity conditions tightened in October. According to RBI, it was mainly on account of the build-up in the government's cash balances and the seasonal increase in currency demand. Consequently, the average LAF borrowings rose to Rs 87,100 crore during October 15-25 surpassing RBI's 1% benchmark level. Does the policy action hint at any change in stance?
It does not look like. RBI continued to priorities in containing inflation over growth. However, it is not unfazed at fueling country's growth engine. Through repeated CRR cuts, it has been ensuring credit flow to productive sectors. A reduction in CRR gives banks extra money to lend. Also read: Banks' financials a pack of lies, RBI keeping mum: Ambit
The monetary policy stance, according to RBI is intended to reinforce the positive impact of government policy actions on growth as inflation risks moderate; and maintain an interest rate environment to contain inflation and anchor inflation expectations.
"The delivery of token 25 bps CRR cut is seen cosmetic when deficit system liquidity is more than 1.25% of NDTL. The stance of RBI is seen as conservative and not cautious post recent developments. So, it is back to waiting-time for shift into rate cut mode, expected to be in January-March 2013," Moses Harding, head of asset liability committee and economic research at IndusInd Bank said in a report. RBI policy actions at a glance:
| Date | Reverse Repo | Repo | SLR | CRR |
| October 30, 2012 | 7 | 8 | 23 | 4.25 (-25) |
| September 22, 2012 | 7 | 8 | 23 | 4.50 (-25) |
| August 11, 2012 | 7 | 8 | 23 (-100) | 4.75 |
| April 17, 2012 | 7 (-50) | 8 (-50) | 24 | 4.75 |
| March 10, 2012 | 7.50 | 8.50 | 24 | 4.75 (-75) |
| January 28, 2012 | 7.50 | 8.50 | 24 | 5.50 (-50) |
| October 25, 2011 | 7.50 (25) | 8.50 (25) | 24 | 6 |
| September 16, 2011 | 7.25 (25) | 8.25 (25) | 24 | 6 |
| July 26, 2011 | 7.00 (50) | 8.00 (50) | 24 | 6 |
| June 16, 2011 | 6.50 (25) | 7.50 (25) | 24 | 6 |
| May 03, 2011 | 6.25 (50) | 7.25 (50) | 24 | 6 |
| March 17, 2011 | 5.75 (25) | 6.75 (25) | 24 | 6 |
N.B. 1) All figures are in per cent term. 2) Bracketed figures suggest hike or cut in rates in terms of basis points. 100 basis points equal to 1%. saikat.das@network18online.com
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