The Reserve Bank of India (RBI) took the half way route today by keeping key policy rates unchanged, but cut the cash reserve ratio (CRR) by 50 basis points to 5.5%. The move will inject primary liquidity of Rs 32,000 crore in the banking system. The CRR cut is effective from the fortnight beginning January 28, 2012.
The central bank kept repo rate unchanged for the second time in as many months as it sees upside risks to inflation from global crude oil prices, lingering impact of rupee depreciation.
"In reducing the CRR, RBI has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance. In the two previous guidance, it was indicated that the cycle of rate increases had peaked and further actions were likely to reverse the cycle," the RBI said in its third quarter review of annual monetary policy for 2011-12.
"The persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them," it added.
The central bank lowered its credit growth expectation to 16% for 2011-12 from 18% earlier.
RBI also reduced its gross domestic product growth (GDP) forecast for the current financial year to 7% from 7.6% earlier but retained its inflation outlook at 7% by March-end.
"Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation," the central bank said.
The policy actions are expected to improve liquidity in the system, anchor medium-term inflation expectations and mitigate downside risks to growth.
The next mid-quarter monetary policy review will be on March 15 and the Annual policy on April 17 this year.