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.

Pranab Mukherjee : Difficult to meet 4.6% fiscal deficit target

India will struggle to meet a fiscal deficit target of 4.6 percent for the fiscal year that ends in March, Finance Minister Pranab Mukherjee said on Wednesday, calling it a "major challenge".

"It will be difficult to achieve the target of fiscal deficit of 4.6 percent for the current financial year though we will make our best efforts to reach as near as possible," Mukherjee said.

FM added that inflation will drop to between 6 percent and 7 percent by the end of March.

India's headline inflation was a 7.47 percent in December, a two-year low as food price pressure eased dramatically.

The current time is most challenging for all policymakers "...we have difficult 2 -3 months in the current fiscal. Our growth for 2011-12 may be around 7 percent plus or even less than that. There are also concerns about central government finances for the current fiscal", he said.

He, however, expressed hope that the Reserve Bank would take appropriate steps in its forthcoming monetary policy review on January 24 to keep the growth momentum.

"Going forward, I am sure RBI will take into account important concerns of balancing the targets of controlling inflation and keeping up growth and employment generation," he said.

The economic growth during the first half of the current fiscal has slipped to 7.3 percent from 8.6 percent in the corresponding period a year ago.

On fiscal deficit, he said the performance during the first half of 2011-12 poses some risks on both receipts as well as expenditure.

Factory activity jumps to highest since June

India's manufacturing activity surged to a six-month high in December thanks to a spike in factory output and new orders from domestic and international firms, a survey of purchasing managers showed on Monday.

The HSBC Markit India Manufacturing PMI jumped to 54.2 from 51.0 in November, its biggest monthly rise since April 2009.

The index has stayed above the 50 mark that separates growth from contraction for 33 months now. The PMI came closest to suggesting a contraction in September when it dipped to 50.4.

Manufacturing in Asia's third largest economy is expanding, just as factory activity in developed economies across the world is contracting. Data released in China on Friday, shows the sector likely shrank in December, after remaining mostly below 50 since July.

"Activity in the manufacturing sector rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated IP data would suggest," said Leif Eskesen, economist at HSBC.

Official data released last month showed industrial output plunged 5.1 percent in the year to October, its steepest fall since March 2009, raising fears the economy might be heading for a hard landing.

However, the new orders index, a reliable gauge of future output, jumped to 57.9 from 52.8 in November, its biggest jump in two years, suggesting the factory sector might be in for better days ahead.

New orders from overseas clients also grew at a faster pace than last month, the second consecutive expansion after shrinking for four months straight.

The Indian economy is facing strong headwinds this year as the euro zone crisis drags on and an agency poll suggests the central bank will ease monetary policy by June to counter this, despite stubbornly high inflation.

While central banks globally, including those in China and Brazil, have eased monetary policy to moderate the impact of the euro zone's sovereign debt crisis, the Reserve Bank of India has chosen to pause its hiking cycle rather than ease, as reining in inflation remains a priority.

India's headline inflation has stayed above 9 percent for 12 consecutive months despite 13 rate increases by the RBI since March 2010 that has lifted the benchmark lending rate to 8.5 percent from 4.75 percent.

"The solid demand from clients allowed manufacturing companies to increase output prices at an accelerated pace to pass on rising costs. While the sequential inflation of input costs decelerated slightly, it remained high by historical standards," said Eskesen.

PMI data showed input prices grew at a slightly slower pace than last month while the output cost index rose for the second month running.

The latest PMI survey also showed that employment grew for the second time in fourteen months.