RBI cuts CRR by 25 bps, keeps rates unchanged

The Reserve Bank of India (RBI) in its quarterly monetary policy review on Tuesday cut the Cash Reserve Ratio (CRR) by 25 basis points (bps). This is the first cut effected since April this year.

CRR - the amount of deposits that banks must keep with the central bank - now stands at 4.25 per cent. The move is expected to inject Rs 17,500 crore into the banking system.

The central bank has, however, kept the repo rate unchanged at 8 per cent.

Though inflation remains a near-time concern, RBI hinted at easing monetary policy further in the January-March quarter.

"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," RBI Governor Duvvuri Subbarao said.

Headline wholesale price index inflation rose to 7.8 per cent in September. The central bank said it expects inflation to rise before easing in the final quarter of the financial year, which ends in March.

"While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13," Subbarao said.

Investors, companies and the government have been clamouring for a cut to interest rates that have been on hold since April and remain some of the highest among major economies.

"Recent policy announcements by the government, which have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions," Subbarao wrote.

The RBI cut its GDP growth forecast for Asia's third-largest economy to 5.8 per cent for the current financial year, from 6.5 per cent previously, and increased its projection for headline inflation in March to 7.5 per cent, from 7 per cent earlier.

**Highlights from the monetary policy review**

• RBI cuts cash reserve ratio (CRR) by 0.25 per cent to 4.25 per cent.
• The central bank injects Rs 17,500 crore of liquidity into the banking system by CRR cut.
• RBI lowers GDP growth forecast for 2012-13 to 5.8 per cent from 6.5 per cent projected earlier.
• RBI ups year-end inflation estimate to 7.5 per cent from 7 per cent.
• The central bank keeps key lending and borrowing rates unchanged.
• Monetary policy actions will support growth, moderate inflation: RBI Governor D Subbarao.

With inputs from agencies