The central bank releases Rs.17,500 crore into the system

The Reserve Bank of India (RBI), on Tuesday, kept the indicative policy rates unchanged even while reducing the Cash Reserve Ratio (CRR) — the portion of deposits that banks keep with the central bank — by 25 basis points from 4.5 per cent to 4.25 per cent. This is expected to release liquidity to the tune of around Rs. 17,500 crore into the banking system.

This reduction will be with effect from November 3.

“In reducing CRR, the Reserve Bank intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable and supportive of growth,” said D. Subbarao, Governor, RBI, while announcing the review of its monetary policy for 2012-13.

However, the RBI revised downwards the projection of GDP growth for 2012-13 from 6.5 per cent to 5.8 per cent. The Governor said that industrial outlook remained uncertain. Further, he said that the RBI was concerned about the surging Non-Performing Assets (NPAs) of banks. “NPAs are not alarming but disturbing,” he said. The apex bank hiked banks' provisioning requirement to 2.75 per cent from the existing 2 per cent on restructured standard loan accounts.

The Governor said that systemic liquidity deficit had 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.

However, Dr. Subbarao felt, “the liquidity situation will be comfortable for next few months.”

He said the present CRR cut would improve liquidity, helping banks to cut lending rates further.

The central bank preferred not to reduce the policy rates as it was not seeing easing of inflation in the near future. Inflation turned up again in September, reflecting a partial pass-through of adjustment of diesel and electricity prices, and elevated inflation in non-food manufactured products.

“It is 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,” he added.

“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,” said Dr. Subbarao, adding, “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.” As under-pricing in several products was corrected as part of the fiscal consolidation process, suppressed inflation was being brought into the open, he said. “This correction is necessary and important. Nevertheless, it will result in higher inflation readings,” he added.

The RBI also raised projection for headline WPI inflation for March 2013 to 7.5 per cent from 7 per cent indicated in July. ``The baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year,’’ he said.

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