RBI Cuts CRR, Maintains ‘Status Quo’ On Repo Rate

In its Mid-Quarter Monetary Policy Review, RBI has cut the CRR by 25 basis points from 4.75 per cent to 4.50 per cent. The RBI has however opted to keep the policy repo rate unchanged at 8.0 per cent. The BSE Sensex and Nifty, after the announcement of the monetary policy came off the days high but are trading positively.

After the dismal IIP numbers, the markets were expecting a Repo rate cut. We had however expected RBI to maintain its stance. RBI in its press release has said that the recent developments in US and Europe have addressed the short term growth and risk issues. It has however cautioned that higher liquidity will push up the global asset prices particularly the commodity prices.

After the government has taken bold steps by cutting the diesel subsidy as well FDIs in few sectors, the apex bank has appraised the government by saying that the steps taken by government will contribute to greater capital inflows and higher productivity, particularly in the food supply chain. It also said that the inflation pressure remain strong at the retail and wholesale level.

The bank also said that after the repo rate cut in April, 2012, the inflation has not calmed down. For the August 2012, the WPI inflation shot up 68 basis points at 7.55% on Month on Month basis. Going ahead inflation may further edge higher on the back of increased diesel prices and festive season. Besides the rise in commodity prices will exert pressure on the inflation.

The bank has raised the concerns over the industrial growth in the domestic market as well as in China. It has also said that the persistent sovereign debt pressures amidst weakening economic activity in European countries pose significant downside risks to the global economy.

On the liquidity front, the bank sees moderation of the liquidity conditions in the country due to economic slowdown. It has also said that due the festival season and advance tax payments, there could be some seasonal pick up in the credit demand. The RBI, through the CRR cut has released Rs 17000 crore of additional liquidity.

The RBI has said that the government’s actions in the last week will have a significant contribution in the growth of the economy. It has however reiterated that inflationary pressure and twin deficits (current account deficit and fiscal deficit) are restraining it from a stronger monetary policy leading to growth.