The RBI left interest rates unchanged on Tuesday but cut the cash reserve ratio for banks and indicated it may ease monetary policy further in the January-March quarter, although inflation remains a near-term concern.
“As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory,” the Reserve Bank of India Governor Duvvuri Subbarao wrote. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.
The RBI kept its policy repo rate at 8 percent and cut the cash reserve ratio, or the amount of deposits that banks must keep with the central bank, by 25 basis points to 4.25 percent.
The move to cut CRR would inject about 175 billion rupees into the banking system in order to pre-empt potentially tightening liquidity, the RBI said.
Following are highlights from the monetary policy statement and comments from top central bank officials:
* Keeps repo rate unchanged at 8 percent.
* Reverse repo stays at 7 percent.
* Cash reserve ratio cut by 25 bp to 4.25 percent.
* Cut in cash reserve ratio would inject 175 billion rupees of primary liquidity into the banking system.
* There is “reasonable likelihood” of further policy easing in the January-March quarter.
* Managing inflation and inflation expectations must remain the primary focus of monetary policy.
* The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth.
* Baseline GDP growth forecast for 2012/13 cut to 5.8 percent from 6.5 percent earlier.
* Baseline wholesale price index inflation projection for March 2013 raised to 7.5 percent, from 7.0 percent.
* Cut non-food credit growth, M3 projection and deposit growth by 1 percentage points each to 16 percent, 14 percent, and 15 percent, respectively.
* Underlying inflationary pressures reflected in non-food manufactured products inflation has remained stubbornly above comfort levels.
* 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.
* Anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter.
* Persistent increase in rural and urban wages, unaccompanied by commensurate productivity increases, is also a source of inflationary pressures.
* Maintain an interest rate environment to contain inflation and anchor inflation expectations.
* An appreciating rupee will also help to contain inflationary pressures by bringing down the rupee cost of imports, especially of commodities.
* The large twin deficits, i.e., the current account deficit and the fiscal deficit continue to pose significant risks to both growth and macroeconomic stability.
* In a situation of volatile capital flows, the deficit could exacerbate downward pressures on the rupee.
* A persistently large fiscal deficit reduces the space for a revival in private spending, particularly investment spending, without quickly re-kindling inflationary pressures.
* Liquidity pressures pose risks to credit availability for productive purposes and could affect overall investment and growth prospects adversely
* Manage liquidity to ensure adequate flow of credit to the productive sectors of the economy.
GUIDELINES FOR BANKING SECTOR
* Increases the provisioning for restructured standard accounts to 2.75 percent from 2 percent, effectively immediately. Draft guidelines will be issued by end-January 2013.
* To issue guidelines on sharing of information on credit, derivatives, and unhedged currency exposure to rein in non-performing assets.
* Asks banks to sanction fresh loans, and renew loans to new or existing borrowers from January 1 only after obtaining or sharing necessary information among banks.
* Advises banks not to finance purchase of gold in any form other than for working capital finance.
* The target under the priority sector for foreign banks with less than 20 branches has been set at 32 per cent of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher as of March 31 of the previous year, without any sub-target.
* Foreign banks have to prepare roadmaps for meeting the targets for priority sector lending over a period of five years.
* Bank loans to housing finance companies (HFC) intended to be loaned out of up to 1 million rupees per borrower may be included under the priority sector, provided the interest rate charged to the end borrower by the HFC does not exceed two percentage points above the lowest interest rate of the lending bank for housing loans.
* To include urban co-operative banks with strong financials and sound risk management practices as eligible participants to undertake repo transactions in corporate bonds.
* Report of the working group on pricing of credit expected by end-December.
* To place draft guidelines for regulating non-banking financial institutions on the RBI website for comments by end-November.
* Reporting platform for over-the-counter (OTC) trades extended to foreign currency-rupee forwards and options, foreign currency-foreign currency forwards and options between banks and their clients.
* Settlement cycle in primary auction of Treasury Bills changed to T+1 from T+2.
* To undertake reissuance/introduce fungibility of T-Bills/Cash Management Bills with identical maturity dates.