Reacting to the governments moves last week to launch new economic reforms,the Reserve Bank of India Monday said it would 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 RBIs 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 countrys largest bank,the State Bank of India,which has been pushing for a CRR cut,described the move as positive while ICICI said this would keep liquidity in the comfort zone.
Releasing the review,RBI Governor D Subbarao indicated that rate cuts would follow as policy actions to stimulate growth materialize. Finance Minister P Chidambaram responded by 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 and anchoring of inflation expectations, it reiterated.
On the way forward,the RBI said the stance of monetary policy will be conditioned by careful and continuous monitoring of the evolving growth-inflation dynamic,management of liquidity conditions to ensure adequate flows of credit to productive sectors and appropriate responses to shocks emanating from external developments.
Even as demand pressures moderate,supply constraints and rupee depreciation are imparting pressures on prices,rendering them sticky. In terms of the new CPI,inflation (y-o-y) remained broadly unchanged in July from June at close to 10 per cent,held up by rising prices of food items. Over the longer run,holding down subsidies to under 2 per cent of GDP as indicated in the Union Budget for 2012-13 is crucial to manage demand-side pressures on inflation the RBI said.
Reacting to the RBIs decision,Prime Ministers Economic Advisory Council Chairman C Rangarajan said the move to infuse liquidity in the system is more potent than a cut in interest rate and it will help banks expand their credit portfolio. The RBI has taken a cautious step. The latest data on inflation has not been encouraging. Under the circumstances,I believe this is the maximum the RBI could have done, he said.
While the steps taken recently by the government are positive for fiscal consolidation,the central bank wants to see how the deficit situation and inflation evolve before undertaking further cuts. However,we will have to continue to keep an eye on funding costs given the level of CASA (current and savings account) deposit growth in the system, said Chanda Kochhar of ICICI Bank.