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Tuesday, January 29, 2013

RBI cuts repo rate, CRR by 25 bps each

The RBI has cut its key repo rate by 25 bps today to 7.75 per cent.

This comes nine months after its last cut in April 2012, a period during which it staved off continuous pressure to cut rates.

In a surprise move, the RBI has also reduced the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities effective the fortnight beginning February 9, 2013. As a result of this reduction in the CRR, around Rs 18,000 crore of liquidity will be injected into the banking system.

The repo rate cut was in line with market expectations. The case for a cut was strengthened by a slight easing in inflation numbers (still high) during the past few months as well as the measures taken by the Government on the fiscal side.

The RBI had indicated even in its October half yearly policy review that it would look at cutting rates provided inflation came down. It had also said during its mid-quarter review in December that the focus of the monetary policy would now shift to growth.

The RBI said that its policy stance in this review was shaped by two major considerations.

'Critical now to arrest the loss of growth momentum'

First, headline WPI inflation and its momentum edged down in November-December on the back of softening of non-food manufactured products inflation. While conceding that the staggered increase in diesel prices announced earlier this month will percolate through to overall costs and inflation, the RBI said that these price pressures will dissipate over time.

Second, the RBI said, "growth has decelerated significantly below trend through 2011-12 and 2012-13 so far and overall economic activity remains subdued. On the demand side, investment activity has been way below desired levels and consumption demand has started to decelerate. External demand has also weakened due to the slowdown in global growth. On the supply side, constraints in the availability of key raw materials and intermediates are becoming binding.

"In turn, this is being reflected in a widening of the current account deficit (CAD) with adverse implications for external sustainability. While the monetary policy stance has sought to balance the growth-inflation dynamic through calibrated easing, it is critical now to arrest the loss of growth momentum without endangering external stability. The moderation in inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem the growth risks."

The next review will be on March 19 while its annual review will be on May 3, 2013, the RBI said.


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