The Reserve Bank of India today refused to budge to pressure to cut rates and reduced banks’ cash reserve ratio, the proportion of deposits banks keep with the central bank, by another 25 basis points to 4.25 percent. It also indicated a “reasonable likelihood of further policy easing in the fourth quarter of 2012-13”.
Inflation, however, continues to remain a near-term concern. The central bank also revised upwards the inflation target for the full year to 7.5 percent from 7 percent. It also cut the GDP growth target for the current year to 6.5 percent from 7 percent.
It said the reduction in the CRR will release Rs 17,500 crore in the system and is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. “It anticipates the projected inflation trajectory which indicates a rise in inflation before easing in the last quarter,” it said.
It said the stance of monetary policy is to “manage liquidity to ensure adequate flow of credit to the productive sectors of the economy, reinforce the positive impact of government policy actions on growth as inflation risks moderate and to maintain an interest rate environment to contain inflation and anchor inflation expectations.”
It said current account deficit and fiscal deficit continue to pose significant risks to both growth and macroeconomic stability.
“A large current account deficit poses challenges for financing it in the current global environment. 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,” it said.
Reacting to the policy review, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said on CNBC TV18 that the central bank is waiting for an opportune moment to cut the rate and has given sufficient indications that it will most likely cut its repo rate in the firs quarter of 2013.
Read the full press release here.