RBI cuts CRR, rates unchanged
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More reform needed before interest rates can be lowered, bank hints
Reacting to the government's moves last week to launch new economic reforms, the Reserve Bank of India Monday said it will respond with positive actions soon but kept the benchmark interest rates unchanged at 8 per cent for now.
Instead, in a move that provides more money to banks to give easy loans, the RBI's mid-term review of the monetary policy cut the Cash Reserve Ratio (CRR) — the portion of bank deposits compulsorily ceded to it — by 25 basis points. The country's largest bank, the State Bank of India, which has been pushing for a CRR cut, described the move as positive while ICICI said this will keep liquidity in the comfort zone.
Releasing the review, RBI Governor D Subbarao indicated that rate cuts will follow "as policy actions to stimulate growth materialize". Finance Minister P Chidambaram responded saying the government was planning several more steps to push reforms, "which are there on my notepad". But the RBI position for now means banks will have to take the initiative to cut rates on loans for housing and consumer durables if they want to push credit in the upcoming festival season.
While industry leaders expressed disappointment, the central bank noted that since inflation was still above comfort levels, "the primary focus of monetary policy remains the containment of inflation".
The bank has identified twin deficits, current account and fiscal, which have constrained a stronger response of the monetary policy to growth risks. "The cut in CRR to 4.50 per cent will release Rs 17,000 crore into the banking system, ensuring that productive sectors of the economy are not starved of funds," the RBI said.
In April 2012, the RBI had gone in for an impressive rate reduction of 50 basis points expecting fiscal policy support for inflation management alongside supply-side initiatives for addressing the deceleration of investment and growth. "As these expectations did not materialise and inflation remained firmly above 7.5 per cent, the RBI decided to pause in its policy easing in the June review and in the first quarter review of July. The primary focus of monetary policy remains the containment of inflation.
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