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Thersynergyonline Banking Bureau

NEW DELHI, JANUARY 24 :
ON the basis of the current macroeconomic assessment, the Reserve Bank of India (RBI) in its monetary policy review on Tuesday cut the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL). This will be effective the fortnight beginning January 28, 2012.

The central bank left key interest rates untouched on Tuesday but cut cash reserve ratio or CRR by 0.5 per cent to 5.5 per cent.

The repo rate (the rate at which the RBI lends funds to banks) stays at 8.5 per cent and reverse repo rate (at which the RBI borrows money from banks) remains unchanged at 7.5 per cent.

The cash reserve ratio (CRR) was cut 0.5 per cent at 5.5 per cent. This is the percentage of deposits banks have to maintain with RBI.

RBI announced the third quarter (quarter to December 2011) review of the monetary policy on Tuesday.

This reduction in the CRR will inject around Rs 320 billion of primary liquidity into the system.

There is no change in the policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility (LAF) remains at 8.5 per cent.
Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, will continue at 7.5 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.5 per cent.

" The growth in India is decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties. While some slowdown in the growth of demand was the expected outcome of our earlier monetary policy actions to contain inflation, at this juncture, risk to growth has increased," D Subbarao, RBI governor said on Tuesday.

"Even as headline WPI inflation is moderating, it is coming largely from a sharp deceleration in prices of seasonal food items. In respect of other key components, particularly protein-based food items and non-food manufactured products, inflation remains high. Moreover, there are upside risks to inflation from global crude oil prices, the lingering impact of rupee depreciation, and slippage in the fiscal deficit," he added.
The liquidity conditions have remained tight beyond the comfort zone of the Reserve Bank. Although the Reserve Bank has conducted open market operations, and injected liquidity of over ` 700 billion, the structural deficit in the system has increased significantly. This could hurt credit flow to productive sectors of the economy. The large structural deficit in the system presented a strong case for injecting permanent primary liquidity into the system, he added.

The policy document also spells out the three broad contours of our monetary policy stance. These are:
• to maintain an interest rate environment to contain inflation and anchor inflation expectations;
• to manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission;
• to respond to increasing downside risks to growth.

The policy action will result in easing the liquidity conditions , downside risks to growth will be mitigated and finally medium-term inflation expectations will remain anchored on the basis of a credible commitment to low and stable inflation

Since the Reserve Bank's October Review, there have been significant changes in the global scenario. On the one hand, concerns over the sustainability of sovereign debt problem in the euro area have intensified. On the other, there are modest signs of improvement in the US. In the emerging and developing economies (EDEs), growth has been moderating, reflecting the sluggishness in the advanced economies and the impact of earlier monetary tightening, said D D Subbarao .

The real GDP growth moderated from 7.7 per cent in the first quarter of 2011-12 to 6.9 per cent in the second quarter. This was mainly due to deceleration in industrial growth, while the services sector held up relatively well. GDP growth in the first half of 2011-12 slowed to 7.3 per cent, down from 8.6 per cent in the first half of last year.

Thesynergyonline Economic Bureau

NEW DELHI, JANUARY 24 :
INDUSTRY body ASSOCHAM welcomed the RBI's move to cut cash reserve ratio (CRR) by 50 basis points, saying it will release Rs 32,000 crore and help fund viable projects held up due to liquidity crunch.

"The focus is now shifting from controlling inflation to restoring growth momentum as liquidity in the system tightens further," said secretary general D.S. Rawat. "However the risk to inflation and inflation expectations continue to be high, forcing the RBI not to change key interest rates."

This is a bold step to rein in inflation and address concerns over growth which are now taking centre-stage with the GDP growth rate likely to touch 7 per cent in 2011-12, he said.

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