RBI Reduces Repo Rate
RBI has reduced the repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly drop from 8.5 to 8.0 per cent. Consequent to this, the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets calibrated to 7.0 per cent. Similarly, the marginal standing facility (MSF) rate, which has a spread of 100 bps above the repo rate, stands adjusted to 9.0 per cent. In order to provide greater liquidity cushion, RBI has also decided to raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from one per cent to two per cent of their net demand and time liabilities (NDTL).
Risk Factors: The RBI Governor has highlighted the risks to indicative projections of growth and inflation for 2012-13:
First, a major risk to our growth and inflation projections stems from the outlook for global commodity prices, especially of crude oil. Although upside risks to oil prices from the demand side are limited, geo-political tensions are a concern. Any disruption in supplies is likely to lead to further increase in crude oil prices.
The second risk emanates from the fiscal situation. Even though the Budget has proposed a reduction in the fiscal deficit in the current year, there are several upside risks. Any slippage in the fiscal deficit will have implications for inflation.
Third, the large Government borrowing budgeted for 2012-13 has the potential to crowd out credit to the private sector. If that happens, the supply response required to accelerate growth could be inhibited.
Fourth, the financing of the current account deficit will continue to pose a major challenge.
And finally, structural imbalances in protein-rich foods persist, and consequently, food inflation is likely to remain under pressure.