CRR Cut by 25 Basis Points
RESERVE Bank of India has cut the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their Net Demand and Time Liabilities (NDTL) effective the fortnight beginning February 9, 2013.
The reduction in the CRR, will inject around Rs. 180 billion of primary liquidity into the banking system.
The policy repo rate under the liquidity adjustment facility is reduced from 8.0 per cent 7.75 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 be 6.75 per cent instead of 7.0 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, now at 9.0 per cent will be adjusted to 8.75 per cent.
Why the Change?
RBI Governor, Subba Rao has explained the rationale behind the policy action:
First, both headline wholesale price inflation and its core component, non-food manufactured products inflation, have softened through the third quarter. This provided some relief from the persistence that dominated the first half of the year. Several indicators such as the weaker pricing power of corporates, excess capacity in some sectors, the possibility of international commodity prices stabilising as well as inflation momentum measures suggest that inflationary pressures have peaked. However, further moderation in inflation going into the next fiscal year is likely to be muted as the correction of under-pricing of administered items is still incomplete and food inflation remains elevated. Accordingly, the setting of monetary policy has to remain sensitive to these conflicting pressures and attendant risks.
Second, growth has decelerated significantly below trend through the last fiscal year and through this year so far, and overall economic activity remains subdued. On the demand side, investment activity has been way below desired levels and consumption demand too has started to decelerate. External demand has also weakened due to languid global growth. On the supply side, constraints in the availability of key raw materials and intermediates are becoming binding. While the series of policy measures announced by the Government has boosted market sentiment, the investment outlook is still lacklustre, especially in terms of demand for new projects.
The third consideration that informed our decision is that liquidity conditions have remained tight. Although the Reserve Bank lowered the cash reserve ratio, CRR, successively in September and October 2012, and carried out open market operations (OMO) injecting systemic liquidity of Rs. 470 billion during December and January to augment liquidity, the average net LAF borrowings at Rs. 910 billion in January have been above the Reserve Bank's comfort level. This tightness could potentially hurt credit flow to productive sectors of the economy. The structural deficit in the system provided a strong case for injecting permanent primary liquidity into the system.