RBI to inject Rs32,000 crore, keeps interest rate unchanged

The Reserve Bank today announced 0.5 percentage point cut in cash reserve ratio to inject Rs32,000 crore into the system, but the measure may not lead to immediate reduction in EMIs for borrowers.

While RBI "shifted" the policy stance from inflation to growth which faces downside risks, borrowers reeling under high interest rates can draw solace from the announcement that "future rate actions will be towards lowering them".

However, the interest rate cut (repo rate) would depend on the government disciplining its expenditure, RBI said.

In its third quarterly review of the monetary policy, RBI kept the short-term lending rate (repo) unchanged at 8.5%. It also did not alter bank rate of 6%.

Addressing concerns over decelerating growth, upside risks to inflation and tight liquidity conditions, the central bank has left banks with more resources for lending through CRR cut, which will come into effect from January 28.

Despite a sharp reduction in food prices, RBI took a cautious view and refrained from reducing interest rates.

"Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate," RBI Governor D Subbarao said adding March end inflation would be 7%.

RBI lowered growth projection for 2011-12 to 7% from 7.6% in view of global slowdown and domestic policy constraints. The new CRR rate would be 5.5%.

The stock market reacted positively to the policy announcement and the banking stocks, in particular, shot up.

Subbarao warned that unless the government contains its fiscal deficit, rate cut is not possible. "In the absence of credible fiscal consolidation, the RBI will be constrained from lowering the policy rates...the forthcoming budget must...begin this process in a credible and sustainable way".

Commenting on the RBI decision, Secretary in the Department of Economic Affairs, R Gopalan, said, "CRR cut ensures that fair amount of money is available, the cost of fund is reduced ... All these things are good to create a growth enhancing impression."

Projecting a lower growth of 7% for 2011-12, RBI said the policy actions are meant to "mitigate downside risks to growth" and anchor inflationary expectations.

Subbarao said, "Even as inflation remains elevated, despite moderation, downside risks to growth have increased. The growth-inflation balance of the monetary policy stance has now shifted to growth".

He further said slippage on fiscal deficit, crude prices and rupee depreciation are key challenges for inflation, which after remaining near double digit for almost two-years came down to 7.5% in December 2011.

The Reserve Bank also said the government should deregulate diesel prices in order to contain the trade deficit, which is expected to widen to USD 160 billion during the current fiscal.

The central bank further said the current levels of domestic prices of petroleum products do not reflect international prices.

The Chairman of Prime Minister's Economic Advisory Panel, C Rangarajan, said RBI has taken a "wise decision" and it would lead to softening of interest rate.

"Improvement in liquidity condition will automatically have effect on interest rate. Improvement in liquidity condition will lead to softening of interest rate," he said.

Reacting to the policy, while several bankers said that they may not go in for rate cut immediately, a few like Oriental Bank of Commerce Executive Director SC Sinha said the CRR cut would "definitely lead to reduction in interest rates."