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    RBI cuts CRR; leaves repo rates unchanged

    RBI cuts CRR; leaves repo rates unchanged
    The Reserve Bank of India (RBI) kept repo rates steady today, belying expectations of a rate cut, following a call to reduce interest rates after the government initiated measures for fiscal consolidation. However, the central bank has cut the cash reserve ratio (CRR) by 0.25 basis points.

    "On the basis of an assessment of the current macroeconomic situation, it has been decided to reduce the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.75 per cent to 4.50 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning September 22, 2012. Consequently, around 170 billion of primary liquidity will be injected into the banking system; and keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent. Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent," the RBI has stated in a press release.

    The RBI was widely expected to keep policy rates unchanged, but a slew of reform measures initiated by the government last last week prompted calls from the industry and raised hopes for a rate cut.

    However, the August inflation data which came in was higher than expected of 7.56% and the RBI expects inflation to go up further following a hike in the diesel rate.

    "Headline WPI inflation (y-o-y) has remained sticky at around 7.5 per cent throughout the current financial year so far. At the disaggregated level, within primary food articles, the easing of vegetable prices in July-August was to a large extent offset by the surge in prices of cereals and pulses. Demand-supply imbalances in respect of protein-rich items persist," the RBI has stated in its Monetary Policy Review.


    According to it, Fuel price inflation picked up in August, largely reflecting the upward revision in electricity prices. As welcome as the recent hike in diesel prices/rationalisation of LPG subsidy has been, the pass-through to administered prices remains incomplete.

    "International crude prices are vulnerable to being driven up further by global liquidity. Core inflation pressures remained firm with non-food manufactured products inflation inching up from 5.1 per cent in April to 5.6 per cent in August and the momentum indicator remaining elevated. Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky," the RBI has noted.

    Read more about: monetary policy
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