RBI Monetary Policy Review: CRR, repo rates remain unchanged

Updated: Tuesday, July 30, 2013, 12:15 [IST]

The RBI Monetary Policy as was largely expected, turned out to be a non event with the RBI leaving CRR and repo rates unchanged, in a move aimed at battling a falling rupee. From fighting the growth and inflation dynamics, in its previous policies, the RBI has indicated that its priority has shifted to the falling rupee.

The RBI release has sounded more dovish by stating that the recent forex steps would be rolled back, if the volatility in the rupee is contained.

"On the domestic front, the foreign exchange market came under severe stress starting late May, prompting the Reserve Bank to initiate liquidity tightening measures to contain the volatility. As regards economic activity, risks to growth have increased notwithstanding the robust onset and spread of the monsoon. Industrial production has slumped, with lead indications of declining order books and input price pressures building on rupee depreciation," the RBI has stated.

It maybe recalled that the RBI has already squeezed large amounts of money in the last three weeks to drain money from the banking system to prevent a slide in the Indian rupee.

Almost a week back, RBI told banks that they would be permitted to borrow under the liquidity adjustment facility (LAF) only up to 0.5 per cent (lowered from one per cent) of their net deposits and time liabilities at the benchmark interest rate of 7.25 per cent.

Additionally, RBI also tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central bank.

After undertaking these measures it was almost certain that the RBI would not loosen monetary policy by either reducing the repo rate nor the CRR rate. Otherwise, it would nullify all of the steps taken in the last few weeks in defence of the rupee.

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