Mumbai, Oct 30(PTI): The Reserve Bank of India, indicating that managing inflation remains its concern, on Tuesday left key interest rates unchanged but reduced the cash reserve ratio or CRR by a quarter of a percentage point to release liquidity into the system.
The reduction of the CRR – the portion of deposits that banks have to park with the RBI --- to 4.25 per cent will release around Rs 17,500 crore in the financial system.
But the repo rate, at which RBI lends to the system, has been retained at 8 per cent. The reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remains at 7 per cent.
Reacting to the policy, the BSE 30-share sensitive index or Sensex, slid by 181.72, or 0.98 per cent, to 18,454.10 at 1138 hrs. A fall in the stocks of interest-linked sectors such as banking, realty and automobile companies mainly influenced the trading sentiment.
Marketmen said investors ignored RBI move to reduce the CRR, and had been expecting rate cuts.
The broad-based National Stock Exchange index Nifty was down by 68.15 points to 5,597.45.
RBI governor D Subbarao, unveiling the mid-year monetary policy review, said the new rates will be effective November 3.
“Managing inflation and inflationary expectations remains the primary focus of the monetary policy,” Subbarao said, stating that the persistently high inflation remains a “key challenge” even though growth has slid.
The easing of CRR would release primary liquidity, prompting banks to cut interest rates.
The RBI has also revised downwards the GDP growth estimate to 5.8 per cent from the earlier 6.5 per cent, while increased its March-end headline inflation forecast to 7.5 per cent. It is the second time since the beginning of the fiscal that it has revised its estimate on both the aspects.
There had been was widespread expectation that the Governor may play ball with the government after North Block announced a fiscal consolidation roadmap against the backdrop of the backdrop of the gush of reform measures announced in the past 45 days.
Subbarao said the RBI would be better placed to ease interest rates after the government’s efforts bear fruit. The RBI has been consistently criticised for its tight money policy.
“As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a higher growth trajectory,” Subbarao said.
In the second quarter review, the RBI also introduced a slew of measures on banking regulation, including steeply increasing the provisioning on standard restructured assets to 2.75 per cent from the earlier 2 per cent from immediate effect.
This move will dearly impact the banks, which have been witnessing an unprecedented rise in loan restructuring due to economic stress. Some critics also call it as a ploy by the banks to restructure loans, and not show them as NPAs, in order to protect their bottomlines.
Significantly, the policy does not mention anything about new bank licences but said initiatives will be taken for having new urban co-operative banks.
The other moves ushered in include a revision in priority sector lending norms, guidelines to banks on restructuring and non-performing assets management, management of unhedged currency exposures of companies and insistence of timely reporting of advances to credit information companies.
RBI also said the existing KYC or know-your-customer requirements used for new account openings will be simplified soon, liberalising opening of administrative offices in tier-I centres for domestic banks and having an additional batch of NEFT clearance at 8 AM daily.