CRR Cut by 25 Basis Points - No Change in Policy Interest Rate
RESERVE Bank of India has cut the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.5 per cent to 4.25 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning November 3, 2012.
The reduction in the CRR, will inject around Rs.175 billion of primary liquidity into the banking system.
There is no change in policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility remains at 8.0 per cent.
Consequently, the reverse repo rate under the liquidity adjustment facility (LAF), determined with a spread of 100 basis points below the repo rate, will continue at 7.0 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.0 per cent.
Why the Change?
RBI Governor, Subba Rao has explained the rationale behind the policy action:
The decision to cut the CRR and keep the policy interest rate unchanged draws from the assessment of the evolving liquidity situation and the growth-inflation dynamic.
++ Liquidity: Systemic liquidity deficit has been high because of several factors: the wedge between deposit and credit growth, the build-up of Government's cash balances from mid-September and the drainage of liquidity on account of festival-related step-up in currency demand. This high systemic deficit will have adverse implications for the flow of credit to productive sectors and for the overall growth of the economy going forward.
++ As regards the growth-inflation balance, headline WPI inflation moderated from its peak of 10.9 per cent in April 2010 to an average rate of 7.5 per cent over the period January-August 2012. During this time, growth has slowed and is currently below trend. This slowdown is due to a host of factors, including monetary tightening.
++ Since April 2012, the Reserve Bank's monetary policy stance has sought to balance the growth-inflation dynamic through calibrated easing. The transmission of these policy impulses through the economy is still underway. In conjunction with the fiscal and other measures recently announced by the Government, the Reserve Bank's monetary policy stance should work towards arresting the loss of growth momentum over the next few months. Yesterday's statement by the Finance Minister reaffirming commitment to fiscal consolidation will open up space for monetary policy to restrain inflation and support growth.
++ Inflation: It turned up again in September, reflecting the partial pass-through of adjustment of diesel and electricity prices, and elevated inflation in non-food manufactured products. It is, therefore, critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised.
CRR is a waste - SBI Chairman: The SBI Chairman was as usual not impressed. He says, "CRR is a waste" for the economy and successive interest rate cuts by central bank have failed to contain inflation. The SBI Chairman reiterated his demand to do away with CRR.