CRR cut 50 bps by RBI, repo & reverse repo rate unchanged

The Reserve Bank of India in its quarterly review meet on Tuesday cut the cash reserve ratio (CRR) by 50 bps to ease tight liquidity pressure in the banking system. RBI kept repo and reverse repo rates unchanged at 8.5% and 7.5% respectively, despite mounting anxiety over slowdown in growth.

The cash reserve ratio, the proportion of deposits that banks have to hold with the RBI, is a popular instrument to inject cash into the system. It now stands at 5.5%.

Tuesday's cut lowers the CRR to 5.50 per cent from 6.00 per cent, where it had stood since April 2010, and releases Rs 32,000 crore ($6.4 billion) of liquidity into the banking system, the RBI said.

Citing that the CRR cut reinforces guidance on further rate cuts, RBI said that the interest rate cycle has peaked. The central bank said that risks to economic growth have increased and cut its GDP projection to 7% vs 7.6% earlier for FY-12.

On the issue of keeping key interest rates unchanged, the bank said it was premature to cut them before a substantial dip in inflation.

The RBI, which remains worried about persistently high core inflation, had recently indicated a reluctance to cut CRR by noting that it viewed the measures as not only a liquidity tool but a monetary policy signal.

The Reserve Bank of India's move to cut the cash reserve ratio (CRR) for banks is aimed at permanently addressing the structural liquidity deficit, RBI Governor Duvvuri Subbarao said. Tuesday's CRR cut should be seen as a signal of easing intent, Subbarao said.

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"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.

Banks are borrowing more than Rs 1.2 lakh crore from the RBI, which is double of what the central bank has said it is comfortable with.

According to experts, commencement of interest rate cuts may take longer despite slowing growth, as the two-year-low inflation number may be short-lived due to fiscal profligacy, widening of welfare schemes, and a weak currency.

The bank hiked rates 13 times since March 2010, the most aggressive pace of monetary tightening among its global peers, to deal with the persistently high inflation, including rising prices of food items. The RBI left interest rates unchanged in December.

The Reserve Bank of India (RBI) on Monday said the growth outlook and business climate have weakened but warned of upward risks to inflation in its Macroeconomic and Monetary Developments Third Quarter Review 2011-12.

For the quarter ended September last year, the economy grew at 6.9 per cent, its weakest pace in more than two years.
The RBI in its Macroeconomic review said it expects growth to improve in the fiscal year that starts in April, but that weak investment climate and contraction in demand may keep the recovery slow.