RBI delivers the unexpected; maintains a status-quo on Repo and CRR

18 Jun 2012 Evaluate

Furthering the over two-year-old anti-inflationary stand, Reserve Bank of India (RBI), this time too, in its Mid-Quarter Monetary Policy Review, has preferred to sacrifice growth over inflation and left the key cash reserve ratio (CRR) and policy repo rate untouched at 4.75% and 8% respectively. The Reserve Bank had frontloaded the policy rate reduction only in April with a cut of 50 basis points. Consequent, to this standstill stance, the reverse repo rate under the LAF will remain unchanged at 7% and the marginal standing facility (MSF) rate and the Bank Rate at 9%. However, the Central Bank of India to further augment liquidity and encourage banks to increase credit flow to the export sector, increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, a move which will potentially release additionally liquidity of over Rs 30000 crore, equivalent to about 50 basis points reduction in the CRR.

Uncomfortable with soaring headline inflation, more importantly the Retail Inflation, measured as Consumer price index (CPI) inflation, which entered double digits of 10.36% in April from 9.38% in March and deteriorating global macroeconomic and financial conditions, RBI in opted to battle out the inflation first. 'Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,' the RBI reported in its mid-quarter policy review. Rupee’s fall which counterbalanced the positive impact that the wholesale prices Index, could have given the decline of the international crude prices, also emerged to be one of the reason behind the policy of standstill by RBI.

The central bank of India, to tackle inflation, raised its key lending rate 13 times since March 2010 but appeared reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April. However, RBI in its forward guidance has clearly stated that the evolving growth-inflation dynamic would continue to influence its decision-making. Further the RBI' in its statement has said that ‘Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks'.

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RBI delivers the unexpected; maintains a status-quo on Repo and CRR

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