Recognising the pressures created by the structural liquidity deficit and the increasing downside risks to growth, the Reserve Bank of India (RBI) slashed the cash reserve ratio (CRR) from six per cent to 5.5 per cent in the third-quarter monetary policy review to boost the confidence of market participants.
The cut in CRR, to be effective from January 28, is expected to infuse Rs 32,000 crore into the banking system. This, combined with the open market operations, should be supportive of the government’s borrowing needs, as well as the corporate credit demand during the fourth quarter of FY12 — the busiest quarter of any financial year.
By lowering the gross domestic product growth forecast for 2011-12 from 7.6 per cent to seven per cent and revising the indicative projections for non-food credit downwards from 18 per cent to 16 per cent, RBI has openly admitted that downside risks to growth have increased. By affecting a 50-basis point cut in the CRR, it has ensured there would not be any serious disruption to credit flows to productive sectors.
However, RBI continues to be cautious on the inflation front. It has not lowered its inflation projection of seven per cent for end-March, despite the recent moderation in headline inflation, due to the likely impact of the rupee depreciation and the repressed energy price inflation.
RBI has given a clear message that “a growth-centric fiscal policy is a prerequisite for the success of easy monetary policy, going forward”.
MD Mallya
Chairman and MD, Bank of Baroda