RBI decided today cut CRR but kept interest rates unchanged

The Reserve Bank kept interest rates unchanged in its third quarter policy review on Tuesday but slashed the cash reserve ratio (CRR) for banks as a way to relieve tight liquidity, a move that would cheer markets as a sign of easing intent.

The RBI has decided to cut the cash reserve ratio (CRR), the proportion of deposits that banks must hold with the central bank, by 0.50 percent from 6 percent to 5.5 percent, where it has stood since April 2010.

The central bank however, maintained repo (rate at which banks borrow from RBI) at 8.5 percent, reverse repo (rate at which the RBI borrows from banks) at 7.5 percent.

A cut in the CRR would ease banking system liquidity that has been far tighter than the RBI's target of 1 percent surplus or deficit in terms of aggregate deposits.

"The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained," RBI Governor Duvvuri Subbarao said in his policy statement.

Tuesday's CRR cut should be seen as a signal of easing intent, Subbarao said.

"The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them," Subbarao said, adding that it was premature to cut the policy interest rate based on the current inflation outlook.
On Monday, banks borrowed Rs 1.42 trillion from the RBI's repo window, more than double the Rs 600 billion that would indicate a deficit of 1 percent.

The RBI said that GDP growth during the current fiscal is likely to fall below its earlier projection of 7.6 percent, while inflation, which is still a cause for concern, may moderate to 7 percent by March-end.

"Even as the growth slowdown emerges as the major challenge, inflation risks persist, posing a challenge for monetary policy in achieving low and stable inflation with minimal sacrifice of growth," said the Macro-Economic and Monetary Developments Review released by the RBI on the eve of the third quarter policy announcement.

Consequently, "Monetary actions will need to strike a balance between risks to growth and inflation," it said.

"Growth is likely to turn weaker than earlier anticipated," the RBI said.

The government also said growth could be around 7 per cent in 2011-12, down from 8.5 percent a year ago.

Commenting on the recent improvement in the price situation, the RBI said, "While in the short run, moderating inflation will provide some space for monetary policy to address growth concerns, in the absence of structural measures to address a range of supply bottlenecks, this will be temporary respite."

Overall inflation, which has remained near double digits for 11 months, declined to 7.5 percent in December, 2011.