| RBI cuts CRR, retains key interest rates |
MUMBAI The Reserve Bank of India (RBI) left interest rates unchanged but cut the cash reserve ratio (CRR) for banks on Monday, disappointing market hopes that it would follow up the government’s unexpected spate of bold reform measures by reducing borrowing costs.
While the Reserve Bank of India praised New Delhi’s long-stalled policy initiatives to bolster growth and shore up its creaking fiscal position, it said the primary focus of monetary policy remained fighting stubbornly high inflation. The government, in turn, made clear it wants a rate cut at the bank’s next monetary policy review in six weeks time, and said it was not yet finished with reforms.
The central bank held its policy repo rate at 8 per cent, in line with expectations in a Reuters poll taken on Friday, hours before New Delhi said it would allow foreign direct investment in industries, including supermarkets and airlines.
Several economists said their expectations for when the RBI, which has two more policy reviews scheduled this year, might cut rates remained unchanged. The most recent poll forecast a median 25 basis point rate cut by the end of 2012. “The RBI is still focused on managing inflation. Future moves will be a function of how the government sorts out the fiscal mess,” said Rajeev Malik, senior economist at CLSA in Singapore.
“A rate cut on Monday would have made the RBI a laughing stock given that inflation is high, rising and will rise more, and it is already above the RBI’s forecast.”
Ratings agency Standard & Poor’s, which earlier this year threatened to cut India’s rating to junk, also offered a cautious response to the government’s reform efforts, saying the moves on foreign investment were encouraging but that it remained to be seen whether they could be implemented.
Since individual states will be allowed to opt-in or out of allowing in foreign supermarkets, “the actual impact from this measure might be less than expected,” Takahira Ogawa, S&P’s director of sovereign Ratings, said in an email.
The RBI cut the cash reserve ratio, the share of deposits banks must keep with it, by 25 basis points to 4.5 per cent in a move to inject about Rs170 billion into the banking system ahead of expected liquidity tightness due to advance tax payments and festive-season demand.
“The RBI felt compelled so they have chosen the least harmful way of responding by a token CRR cut,” said A Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai.
“The government’s recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from subsidies,” the RBI wrote in its policy statement.
“However, in the current situation, persistent inflationary pressures alongside risks emerging from twin deficits constrain a stronger response of monetary policy to growth risks,” the RBI said.
Reuters
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