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RBI cuts CRR by 25 bps, repo rate unchanged at 8 pc

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Sep 17, 2012 at 04:39pm IST

New Delhi: The Reserve Bank of India (RBI) cut the cash reserve ration (CRR) by 25 basis points, which will leave Rs 17,000 crore more with the banks. Announcing its credit policy on Monday, which came in the backdrop of some big bang reforms pushed by the UPA Government, the RBI brought down the CRR from 4.75 per cent to 4.50 per cent.

However, the repo rate remained unchanged at 8 per cent as the apex bank continues to target inflation, which has shown no signs of cooling down. As a consequence of there has been no change in the reverse repo rate too.

With interest rates remaining the same, the EMIs on loans remained unchanged.

The reverse repo, at which it absorbs excess liquidity through borrowings from banks, remains at 7 per cent.

"As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations," RBI Governor D Subbarao said while announcing the mid-quarter review of the monetary policy.

Prime Minister's Economic Advisory Council (PMEAC) Chairperson C Rangarajan called the policy a 'cautious move' and said that the RBI actions would be based on how inflation pans out in the future.

State Bank of India Chairperson Pratip Chaudhuri called the policy "a very positive move". "It is a very positive move, as a mid-term policy it is very significant. I think the RBI has given a clear signal that they are willing to respond and that they have taken note of the signs of deceleration in economy," Chaudhuri said.

The wholesale price-based inflation for August moved up to 7.55 per cent from 6.87 per cent in the previous month.

The RBI said the CRR cut would be effective from September 22.

The moderation in CRR rate is likely to goad banks to bring down their lending rates, which will improve investments and help growth.

Noting that growth continues to be weak amidst a negative investment climate, the RBI policy review said that the recent reform measures undertaken by the Government have started to reverse sentiments.

Among other decisions, Government hiked the regulated diesel prices by over Rs 5 per litre, which satisfies the RBI's long standing demand for containing fiscal deficit while also liberalising foreign holding norms in a string of sectors.

RBI said the measures on diesel prices and LPG usage will hurt inflation in the short term, but the steps are a "significant achievement" as they will strengthen macroeconomic fundamentals.

It also noted, with concern, that the rationalisation of cooking gas prices will not have much impact on subsidies as the pass-through to administered prices remains incomplete.

(With additional information from PTI)

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