"The RBI’s Second Quarter Review of Monetary Policy, 2012-13 reiterates its view that price stability is the overriding objective of monetary policy and a key to achieving broader economic stability. Given that the retail price inflation is hovering near a double-digit level and India’s twin deficits (fiscal and current account) remain high, the RBI has decided to keep the repo rate unchanged at 8.0% but cut the cash reserve ratio (CRR) by 25 bps to 4.25%.
"Reduction in CRR (which is expected to release Rs 17,500 crore of primary liquidity into the banking system) should be supportive of higher demand for funds associated with the busy and festive season.
"Factoring in the increasing stresses on investment and growth, the RBI has revised down its GDP growth projection to 5.8% in 2012-13 from 6.5% and lowered its indicative target for non-food credit growth to 16.0% from 17.0% earlier. Further, it has lowered the M3 growth target to 14.0% from 15.0% and deposit growth target to 15.0% from 16.0% in view of the persistence of inflation and the overall economic slowdown. While the RBI expects inflation to somewhat ease in the fourth quarter, the underlying pressures from accommodative fiscal policy and correction in administered prices of fuel components has prompted it to revise up its inflation projection to 7.5% by March 2013 from an earlier 7.0%.
"Reaction of equity, gilt and forex markets to today’s policy is a knee-jerk reaction and likely to get reversed soon. Despite several constraints, the policy has tried to support growth through more liquidity infusion and that is the maximum a central bank can do at the present juncture.
"The government’s continued efforts to consolidate fiscal position and spur investments combined with the RBI’s optimistic guidance for the fourth quarter of the current financial year should boost investor confidence and stabilise financial markets sooner than later."