RBI maintains status quo on policy rates; cuts CRR by 0.25%

http://www.thehindubusinessline.com/industry-and-economy/banking/rbi-maintains-status-quo-on-policy-rates-cuts-crr-by-025/article4046575.ece

The RBI maintained status quo and left its key repo rates unchanged.

The repo rate remains at 8 per cent, at the same level that it has been for the past six months. This was in line with the hint thrown in its review of macroeconomic and monetary developments released yesterday evening, that it may cut policy rates 'down the line'.

In doing so, the RBI chose to not oblige the Government expectations that it would cut rates in response to policy measures unveiled over the past month as well as the 5-year fiscal consolidation plan released yeseterday. The government hopes to cut the fiscal deficit to 3 per cent of GDP over the next five years.

For the current fiscal, the Government has admitted that keeping the fiscal deficit to the budgeted 5.1 per cent would be difficult while 5.3 per cent was doable.

Infuses liquidity into the system

The RBI, however, cut the Cash Reserve Ratio (the amount parked by banks with the RBI) by 25 basis points from 4.5 per cent to 4.25 per cent. This measure is expected to infuse Rs 17,500 crore liquidity into the system.

The RBI said in its guidance, "The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter. 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."

It expected these actions to enable liquidity conditions to facilitate a turnaround in credit growth to productive sectors so as to support growth; reinforce the growth stimulus of the policy actions announced by the Government as inflation risks moderate; and anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

The RBI has also been paring its GDP growth forecasts through successive quarterly reviews. In its April policy, the RBI had projected a GDP growth forecast of 7.3 per cent. That was cut to 6.5 per cent in July and further to 5.7 per cent yesterday. Simultaneously, the RBI has also revised upwards its baseline projections for WPI inflation. This has been raised from 6.5 per cent given at the beginning of the fiscal to 7.5 per cent for March 2013.