The Reserve Bank of India (RBI), on Monday, retained the indicative policy rates at the current level. The Cash Reserve Ratio (CRR) has been cut by 25 basis points to 4.50 per cent, injecting a liquidity of around Rs.17,000 crore into the banking system.
The CRR cut will be effective from September 22, 2012. CRR is the portion of deposits that banks keep with the RBI, and it does not earn any interest for banks. RBI slashed CRR by 150 basis points so far in 2012.
The RBI cut the CRR with a future outlook. “Liquidity conditions have remained comfortable since the first quarter review. However, going forward, the wedge between deposit growth and credit growth could widen on the back of the seasonal pick-up in credit demand in the second-half of the year.”
The short-term policy rate, repo rate, unchanged at 8 per cent and Reverse repo rate at 7 per cent. Repo rate is the rate at which banks borrow funds from the RBI, and Reverse repo is the rate at which banks park their funds with the central bank. The central bank complemented the government for taking actions to spur growth, and contain fiscal deficit. “Mitigating the growth risks and taking the economy to a higher sustainable growth trajectory require concerted policy action across a range of domains, a process to which last week’s actions made a significant contribution.” The government undertook long-anticipated measures towards fiscal consolidation by reducing fuel subsidies, and clearing sale of stakes in select 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.”
Over the longer-run, holding down subsidies to below two per cent of gross domestic product (GDP) as indicated in the Union Budget for 2012-13 “is crucial to manage demand-side pressures on inflation.” Containing inflationary pressures and lowering inflation expectations warrant maintaining the momentum of recent policy actions to step up investment, alleviate supply constraints, and improve productivity,” said the RBI. “Headline Wholesale Price Index (WPI) inflation (year-on-year) has remained sticky at around 7.5 per cent throughout the current financial year so far. Supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky,’’ it said. In terms of the new Consumer Price Index (CPI), the RBI said, inflation (year-on-year) remained broadly unchanged in July from June at close to 10 per cent, held up by rising prices of food items. Notwithstanding some easing in July, core CPI inflation (CPI excluding food and fuel sub-group) remains elevated. The central bank also warned that slowing global demand had adversely affected industrial activity and exports in emerging and developing economies (EDEs). Additionally, drought conditions in major grain-producing areas of the world, and the possibility of further hardening of international crude prices in view of the fresh dose of quantitative easing, impart ubiquitous risks to overall global macro economic prospects, it said. On a hopeful note on the domestic front, the RBI said that “late rains have augmented storage in reservoirs which should improve prospects for the Rabi crop, mitigating, to some extent, the concerns about agricultural prospects.”