RBI keeps policy rates intact
Mint street: Tweaks CRR by 50 bps to infuse Rs 32,000 cr liquidity
The Reserve Bank of India (RBI), on Tuesday, announced a cut in the cash reserve ratio (CRR) by 50 basis points (bps) to 5.5 per cent effective January 28, 2012 to infuse Rs 32,000 crore into the system and ease tight liquidity situation.
CRR is the fixed portion of the total deposits that banks mandatorily have to keep with the apex bank, which is currently at 6 per cent. For every Rs 100 deposit with the RBI, banks will have to set aside Rs 5.50 as CRR instead of Rs 6 earlier.
With this cut, RBI also signalled a policy shift towards reviving growth after nearly two years of fighting inflation. At the same time, it sees upside risks to inflation from global crude oil prices, lingering impact of rupee depreciation.
Expectedly, the apex bank left its policy repo rate and reverse repo rate unchanged at 8.50 per cent and 7.50 per cent respectively in its third quarter review of monetary policy 2011-12 as core inflation still being stubbornly high. It may be noted RBI had hiked the policy rates 13 times between March 2010 and October 2011.
“The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained,” said RBI Governor D Subbarao.
Briefing reporters, Subbarao said it would be difficult to predict the timing, pace and magnitude of any interest rate cuts. Many presume that a reduction in CRR means that interest rates will automatically come down, but all that it does is to ensure more availability of funds into the system with which banks have more leeway to extend credit to individuals and companies.
“The persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them,” RBI said.
“Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation,” RBI said.
Department of Economic Affairs Secretary R Gopalan said CRR cut ensures that fair amount of money is available, the cost of fund is reduced. All these things are good to create a growth enhancing impression.
Projecting a lower growth of 7 per cent for 2011-12, RBI said the policy actions are meant to “mitigate downside risks to growth” and anchor inflationary expectations.
“Even as inflation remains elevated, despite moderation, downside risks to growth have increased. The growth-inflation balance of the monetary policy stance has now shifted to growth,” Subbarao said.
Prime Minister Economic Advisory Panel Chairman C Rangarajan said RBI has taken a “wise decision” and it would lead to softening of interest rate. “Improvement in liquidity condition will automatically have effect on interest rate. Improvement in liquidity condition will lead to softening of interest rate,” he said.
