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RBI Cuts CRR 50 bps, Rates Left Unchanged
R ESERVE Bank of India slashed cash reserve ratio (CRR) by 50 bps to 5.5% of Net Demand and Time Liabilities (NDTL)at its third quarter monetary policy on January 24. RBI’s move has been guided by severe liquidity tightness that has prevailed since December. RBI said ―the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks‖ and therefore reduced excessive strain on liquidity with a cut in CRR. RBI’s move will inject around `32,000 crore in the system.
The central bank left interest rates unchanged as non-food manu-factured inflation has remained high and risks to it remain on the upside. RBI remarked that given the risk to inflation trajectory, it would be premature to ease interest rates at this juncture. However, it guided that rates would ease contingent to sustainable modera-tion in inflation. The central bank has also explicitly stated that fiscal consolidation is a pre-condition to easing rates. RBI took the following decisions at its January third quarter review of the 2011-12 (April-March) monetary policy:
CRR cut by 50 bps to 5.5%, while statutory liquidity ra-tion has been left unchanged
Repo rate unchanged at 8.50%
Consequently, reverse repo rate unchanged at 7.50%, as it has been pegged 100 bps below repo rate
Marginal Standing Facility (MSF), instituted 100 bps above repo rate, unchanged at 9.50%
RBI’s pause in rate action in the latest policy follows its assess-ment of upside risks to inflation. Today’s policy is also a reflection of the central bank’s inability to ease rates due to several external and internal factors despite sharply decelerating economic growth momentum, as well as overwhelming presence of downside risks to growth. RBI has indicated a reversal from its tightening mone-tary policy maintained so far, provided core inflation eases sustain-ably. The following point sum up the policy stance:
Interests Rates Easing Contingent on Inflation : RBI high-lighted that global and domestic economic conditions have deterio-rated further from its second quarter monetary policy review in October. Inflation is likely to moderate, but risks remain on the upside. With sharp decline in investments and industrial activity, it is also necessary to look at growth dynamics. However, risks to inflation, particularly due to sharp depreciation of rupee and ele-vated commodity prices, restrict RBI from supporting growth at this juncture. Reversal of interest rates cycle is contingent on mod-eration in inflation.
PRU View: RBI’s policy document reflects RBI’s inability to assist growth due to risks to inflation, despite a clear slowdown in growth and falling investments. However, a CRR cut is pragmatic as it prevents further disruption in the economy due to liquidity stress. RBI has started weighing the weakening global economic scenario along with weakening demand pressures in the domestic economy, but gave conditional guidance for reversal of policy rates. The central bank cut GDP growth forecast further to 7% from 7.6% earlier, but left inflation projection unchanged due to pressure from commodity prices. We feel RBI will cut rates when two conditions are met. One, after non-food manufactured infla-tion shows signs of sustainable moderation and, second, when there are clear signs of fiscal consolidation. Two logical outcomes emerge: expect RBI to support rupee to contain core inflation pressures, and, rate cuts can now happen only after the Budget.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI Cuts CRR 50 bps, Rates Left Unchanged
R ESERVE Bank of India slashed cash reserve ratio (CRR) by 50 bps to 5.5% of Net Demand and Time Liabilities (NDTL)at its third quarter monetary policy on January 24. RBI’s move has been guided by severe liquidity tightness that has prevailed since December. RBI said ―the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks‖ and therefore reduced excessive strain on liquidity with a cut in CRR. RBI’s move will inject around `32,000 crore in the system.
The central bank left interest rates unchanged as non-food manu-factured inflation has remained high and risks to it remain on the upside. RBI remarked that given the risk to inflation trajectory, it would be premature to ease interest rates at this juncture. However, it guided that rates would ease contingent to sustainable modera-tion in inflation. The central bank has also explicitly stated that fiscal consolidation is a pre-condition to easing rates. RBI took the following decisions at its January third quarter review of the 2011-12 (April-March) monetary policy:
CRR cut by 50 bps to 5.5%, while statutory liquidity ra-tion has been left unchanged
Repo rate unchanged at 8.50%
Consequently, reverse repo rate unchanged at 7.50%, as it has been pegged 100 bps below repo rate
Marginal Standing Facility (MSF), instituted 100 bps above repo rate, unchanged at 9.50%
RBI’s pause in rate action in the latest policy follows its assess-ment of upside risks to inflation. Today’s policy is also a reflection of the central bank’s inability to ease rates due to several external and internal factors despite sharply decelerating economic growth momentum, as well as overwhelming presence of downside risks to growth. RBI has indicated a reversal from its tightening mone-tary policy maintained so far, provided core inflation eases sustain-ably. The following point sum up the policy stance:
Interests Rates Easing Contingent on Inflation : RBI high-lighted that global and domestic economic conditions have deterio-rated further from its second quarter monetary policy review in October. Inflation is likely to moderate, but risks remain on the upside. With sharp decline in investments and industrial activity, it is also necessary to look at growth dynamics. However, risks to inflation, particularly due to sharp depreciation of rupee and ele-vated commodity prices, restrict RBI from supporting growth at this juncture. Reversal of interest rates cycle is contingent on mod-eration in inflation.
PRU View: RBI’s policy document reflects RBI’s inability to assist growth due to risks to inflation, despite a clear slowdown in growth and falling investments. However, a CRR cut is pragmatic as it prevents further disruption in the economy due to liquidity stress. RBI has started weighing the weakening global economic scenario along with weakening demand pressures in the domestic economy, but gave conditional guidance for reversal of policy rates. The central bank cut GDP growth forecast further to 7% from 7.6% earlier, but left inflation projection unchanged due to pressure from commodity prices. We feel RBI will cut rates when two conditions are met. One, after non-food manufactured infla-tion shows signs of sustainable moderation and, second, when there are clear signs of fiscal consolidation. Two logical outcomes emerge: expect RBI to support rupee to contain core inflation pressures, and, rate cuts can now happen only after the Budget.
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