Reserve Bank of India (RBI) reduced the policy repo rate by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect in its third quarter review of monetary policy 2012-13.
In order to infuse liquidity into the banking system, the central bank also reduced the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning February 9, 2013. As a result of this reduction in the CRR, around Rs 180 billion of primary liquidity will be injected into the banking system, the central bank said in a press release.
The RBI also adjusted the reverse repo rate, which is determined with a spread of 100 basis points below the repo rate, to 6.75 per cent with immediate effect. Further, the Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.75 per cent with immediate effect, RBI said in a press release.
RBI reduced the policy repo rate following the softening of non-food manufacturing inflation and slackening of economic activity. Headline wholesale price index (WPI) inflation eased significantly from 8.1 per cent in September 2012 to 7.2 per cent by December. Notably, inflation on account of non-food manufactured products, which have a weight of 55 per cent in the WPI, fell sharply in November-December as input price pressures eased primarily on the back of ebbing metal, non-metallic minerals and chemicals group inflation, RBI said in the release.
India’s real GDP growth slowed from 5.5 per cent in Apr-Jun 2012-13 to 5.3 per cent in Jul-Sep 2012-13 on a year-on-year (y-o-y) basis. The decline in the GDP growth rate became broad based, with consumption demand also slowing alongside stalling investment and declining exports. On the supply side, there are indications of weakening resilience of services to sluggish global growth, RBI said.
RBI feels that the above policy measures would support growth by encouraging investment, continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation, and improve liquidity conditions to support credit flow.
RBI expects inflation to remain range-bound around current levels going into 2013-14 as it feels that the headline inflation has peaked and non-food manufactured products inflation has been declining steadily over the last few months. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks, RBI said in the press release.
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