RBI cuts CRR, leaves lending rate unchanged

Mumbai, Jan 24 (PTI): The Reserve Bank of India Tuesday injected Rs 32,000 crore into the system by lowering the cash reserve ratio (CRR) by half-a-percentage point but kept the short-term lending rate unchanged in view of persisting inflationary concerns.

”Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate,” RBI Governor D Subbarao said while unveiling the third quarterly monetary policy review.

With the additional liquidity created by the CRR cut, there is a possibility that banks may reduce the interest rate to attract borrowers.

Projecting a lower growth of 7 per cent for 2011-12, the Reserve Bank said the policy actions are meant to “mitigate downside risks to growth” and anchor inflationary expectations.

The CRR, the amount of deposits the banks are required to keep with RBI in cash, has been reduced to 5.5 per cent from 6 per cent with effect from January 28, releasing Rs 32,000 crore in the system to ease the liquidity problems. The short-term lending rate (repo) has been kept unchanged at 8.5 per cent.

The stock market reacted positively to the policy announcement and banking stocks, in particular, shot up.

The RBI kept the repo or the short-term lending rate at 8.5 per cent while making it clear that any cut in it will only happen after moderation in inflation.

The central bank expects the headline inflation to moderate to 7 per cent by March, but there are concerns over the persistently high prices of non-food manufacturing items.

On CRR cut, RBI said, “Persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. CRR is the most effective instrument for permanent liquidity injections.”

It indicated that future rate actions could see more lowering on the front.

Apart from easing liquidity pressures, the RBI said the policy actions are aimed at mitigating downside risks to growth and anchoring medium term inflation expectations.