The Telegraph
Wednesday , January 30 , 2013
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CRR cut a welcome surprise
RBI prunes repo rate, injects more liquidity

Mumbai, Jan. 29: The Reserve Bank of India (RBI) today not only kept its promise of a policy rate reduction but also spruced it up with a surprise 25-basis-point reduction in the cash reserve ratio (CRR), a move that will release Rs 18,000 crore into the banking system.

In its third-quarter review of monetary policy, the central bank brought down the repo rate by 25 basis points to 7.75 per cent and also CRR by the same margin to 4 per cent.

While the repo is the rate at which the RBI lends funds to banks, CRR is the portion of bank deposits that banks must maintain with the banking regulator.

The central bank, however, was cautious about further rate cuts. It said future reductions would depend upon inflation and the current account deficit.

Ahead of today’s monetary policy review, it was largely expected that the RBI would only bring down the repo rate by 25 basis points and there was a near consensus that CRR would not be altered.

RBI governor Duvvuri Subbarao gave a number of reasons for the twin policy boost.

While both the headline wholesale price inflation (WPI) and the non-food manufactured products inflation had softened through the third quarter, growth had decelerated and overall economic activity remained subdued.

“On the demand side, investment activity has been way below the desired levels and consumption demand, too, has started to decelerate,’’ Subbarao said.

He said the RBI brought down CRR as liquidity conditions were tight, with banks borrowing an average amount of around Rs 91,000 crore on a daily basis from the apex bank’s repo window.

As this tightness had the potential to hurt credit flows to productive sectors of the economy, there was a strong case for injecting money.

Since September last year, the apex bank has infused Rs 1 trillion into the banking system — Rs 53,000 crore as CRR cuts and Rs 47,000 crore through purchases of government bonds.

However, those who were anticipating sharp cuts from the RBI in the months ahead were disappointed as the central bank issued a cautious guidance.

Speaking to reporters at the customary post-policy press conference, Subbarao said there would be easing only if both inflation and the CAD fell further than anticipated.

“If inflation eases further more than expected and the CAD moderates further than anticipated, there will be more room for monetary policy easing. However, if they go along the currently expected lines, the space will be limited,’’ he said.

The RBI governor observed that there could be upside risks to inflation from various fronts.

Frequent diesel price hikes are a short-term risk. Global crude oil prices have plateaued and there are upward pressures building here as well.