Tuesday, January 29, 2013

RBI cut both CRR and Repo rate by0.25%

With inflation slowing, the Reserve Bank of India (RBI) finally bit the bullet and turned its focus towards ebbing growth in the Indian economy. The central bank gave India Inc a bounty of New Year's gifts even as it cut the country's GDP growth forecast. The RBI revised GDP growth target for FY13 downwards for the second time, from 6.5% initially, to 5.5% now. Thus, in order to revive sentiment, the central bank cut both the cash reserve ratio (CRR) and the repo rate by 0.25%.

These rates now stand at 4% and 7.75% respectively. The CRR is currently at its lowest level since December 1974 and the cut will release an additional Rs 180 bn of liquidity into the system. In order to spur loan book growth towards the end of the fiscal, banks may now start cutting lending rates. But, further monetary policy movement will depend on the government's stance. Recent government reforms especially the diesel price deregulation has staved off near term risks on the fiscal front. However, sustained fiscal consolidation is needed in order to create room for further monetary easing. Well, all eyes should now be on the Annual Budget due at the end of Feb.