RBI cuts CRR by 0.25 pc, releases Rs 17,000 cr liquidity
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The
RBI decision, which comes days after a slew of measures taken by the
government to push growth, will release Rs 17,000 crore of primary
liquidity into the system.
The liquidity infusion, RBI said, would ensure adequate flow of credit to productive sectors of the economy.
Following
the cut, CRR will come down to 4.5 percent while the repo rate, at
which the central bank lends to the banks, would remain unchanged at 8
percent.
The reverse repo, at which it absorbs excess liquidity through borrowings from banks, remains at 7 percent.
"As
inflationary tendencies have persisted, the primary focus of monetary
policy remains the containment of inflation and anchoring of inflation
expectations," RBI Governor D Subbarao said while announcing the
mid-quarter review of the monetary policy.
The wholesale price-based inflation for August moved up to 7.55 percent from 6.87 percent in the previous month.
The RBI said the CRR cut would be effective from 22nd September.
The
moderation in CRR rate is likely to goad banks to bring down their
lending rates, which will improve investments and help growth.
Commenting
on RBI's action, State Bank of India (SBI) Chairman Pratip Chaudhuri
said the bank will review its rates in the light of policy action. The
asset liability committee of the bank is expected to meet soon to take a
view on rate revision.
"It
is a very positive move, as a mid-term policy it is very significant. I
think the RBI has given a clear signal that they are willing to respond
and that they have taken note of the signs of deceleration in economy,"
Chaudhuri said on Monday.
Noting
that growth continues to be weak amidst a negative investment climate,
the RBI policy review said that the recent reform measures undertaken by
the Government have started to reverse sentiments.
Among
other decisions, Government hiked the regulated diesel prices by over
Rs 5 per litre, which satisfies the RBI's long standing demand for
containing fiscal deficit while also liberalising foreign holding norms
in a string of sectors.
RBI
said the measures on diesel prices and LPG usage will hurt inflation in
the short term, but the steps are a significant achievement as they
will strengthen macroeconomic fundamentals.
It
also noted, with concern, that the rationalisation of cooking gas
prices will not have much impact on subsidies as the pass-through to
administered prices remains incomplete.
In
spite of the recent fiscal measures, RBI blamed the high fiscal and
current deficits as the factors preventing it from cutting rates.
However,
sounding less hawkish, it said, "The stance of monetary policy will be
conditioned by careful and continuous monitoring of the evolving
growth-inflation dynamic, management of liquidity conditions to ensure
adequate flow of credit to productive sectors and appropriate responses
to the shocks emerging from external developments."
For the moment inflationary pressures both at wholesale and retails levels are still strong, it said.
"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," RBI said.
RBI
also expressed concern over the recent easing of liquidity globally,
saying it will lead to commodity prices spiking up which in turn will be
detrimental for inflation management.
Following are the highlights of the mid-quarter monetary policy review announced by the Reserve Bank on Monday:
* Cash Reserve Ratio cut by 0.25 percent at 4.5 percent
* Repo and reverse repo rates kept unchanged at 8% and 7%
* CRR cut to inject Rs 17,000 crore into banking system
* Government's recent reform initiatives to result in
favourable growth-inflation dynamics
favourable growth-inflation dynamics
* Inflation remains a challenge; growth risks have
increased
increased
* Diesel price hike, subsidised LPG cap to put pressure
on inflation
on inflation
* Economic activity in July-September quarter to remain
subdued
subdued
consolidation.
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