Softening of headline inflation below eight per cent on a year-on-year basis and continued liquidity tightness since May 2010 have facilitated the Reserve Bank of India (RBI) to concentrate on credit and growth aspects in its mid-quarter monetary policy review unveiled on Thursday.
By keeping the short-term lending and borrowing rates and the cash reserve ratio unchanged, RBI has signaled a temporary pause in its tightening cycle. Moreover, it has reduced the statutory liquidity ratio by one percentage point to 24 per cent on a permanent basis and announced pumping in Rs 48,000 crore into the system to inject additional liquidity on an enduring basis.
The move would enable the banks to expand their loan-books in tandem with the productive needs of the economy by stabilising the lending rates. Thursday’s move also factors in an improved transmission of monetary policy signals during the last couple of weeks, with several banks raising deposit and lending rates.
RBI is confident about the strength of the economy’s underlying growth momentum despite upside risks to inflation originating from domestic demand and higher global commodity prices.
It has clearly said that while inflation continued to be a concern, a major challenge in the recent period had been liquidity management. Thursday’s policy will go a long way in bringing liquidity deficit close to the comfort zone and stabilise short-term interest rates.