RBI cuts CRR by 50 bps, keeps repo rate unchanged

The RBI Governor, Dr D. Subbarao, chose to continue in ‘pause’ mode on the rate front, retaining the key repo rate at 8.5 per cent.

But he decided to give markets something to cheer about by cutting the cash reserve ratio (CRR) by 50 basis points and release Rs 32,000 crore into the system. The CRR will now be at 5.5 per cent.

The policy document said that these steps will ease liquidity conditions, mitigate downside risks to growth and continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

The cut in CRR was done to ease the tight liquidity situation. Banks were borrowing nearly 1.2 lakh crore every day at the Liquidity Adjustment Facility (LAF) window of the Reserve Bank of India over the past month. There was also a resort to the additional borrowing at the Marginal Standing Facility (which is one percentage point higher than repo) at 9.5 per cent on a couple of occasions.

Cuts GDP growth outlook

The RBI has revised downwards its forecast for Gross Domestic Product (GDP) growth in keeping with the slowing economic indicators. It now expects GDP growth to be at 7 per cent for this fiscal from the 7.6 per cent estimate it made in the half yearly review in October 2012. At the beginning of the fiscal, GDP growth was expected to be 8 per cent.

Inflation to decelerate further

The Reserve Bank has said that consistent with its earlier projections, inflation is likely to decelerate further to 7 per cent by March. It, however, cautions that there is a large element of suppressed inflation. It points to coal and petroleum products as examples of products that have not seen price revision that reflect underlying market conditions. When revised, this will add to inflationary pressures, the RBI said. It advises that "It will be prudent to fully deregulate diesel prices to contain both aggregate demand and trade deficit."

The RBI also took pains to highlight the fact that in reducing CRR it was not shedding its anti-inflation gear or changing its stance. It said that it was premature to begin reducing policy rate in the light of the current inflation trajectory and the element of suppressed inflation. The RBI chose to say, "The reduction (in CRR) can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them."

The RBI drew attention to the sharp drop in non-food credit to 15.7 per cent in end-December compared to the indicated projection of 18 per cent given earlier. It noted that the deceleration was particularly sharp for public sector banks and was particularly sharp in agriculture, real estate, infrastructure, engineering, cement and cement products.