Giving priority to growth factor, the Reserve Bank of India (RBI) decided to reduce the cash reserve ratio (CRR) by 50 basis points from 6.0 per cent to 5.5 per cent, effective from the fortnight beginning January 28, 2012. As a result of the reduction in the CRR, around Rs 32,000 crore of primary liquidity will be injected into the banking system.
RBI said CRR is most effective for permanent liquidity injection and that the cut is a signal to possible rate cuts in future.
Announcing the third quarter monetary policy review in Mumbai today, RBI Governor Dr. D Subbarao said that growth is decelerating and inflation rate is still not comfortable enough to warrant a rate cut. He said that it was premature to reduce rates on current inflation. He added that persistence of tight liquidity could disrupt credit flow. He said that liquidity management has been a major challenge.
RBI has retained the repo rate under the liquidity adjustment facility (LAF) at 8.5 per cent while the reverse repo rate stands at 7.5 per cent and the Marginal Standing Facility (MSF) rate stands at 9.5 per cent. The Bank Rate has been retained at 6.0 per cent. RBI said through the multiplier effect, additional credit to the tune of Rs 1.6 lakh crore would be generated in the system over a period of time.
GDP forecast has been brought down to 7% from 7.6% earlier. Dr. Subbarao said that risks to economic growth have increased. He said that global scenario has considerably changed after October 2011, adding that global growth during 2012 is expected to be lower than the International Monetary Fund’s September 2011 projection of 4.0 per cent.
Dr. Subbarao said slippage on fiscal deficit, crude prices and rupee depreciation are key challenges for inflation, which after remaining near double digit for almost two-years, came down to 7.5 per cent in December 2011. The central bank expects the headline inflation to moderate to 7 per cent by March 2012. However, the Governor added that decline in food inflation has given some relief. He said inflation will show some moderation in FY’13.
RBI Governor said that the policy actions taken in this monetary policy review are expected to ease liquidity conditions, mitigate downside risks to growth. He said this will enable to continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.
