By Central Bank News
The Reserve Bank of India (RBI) held its benchmark repurchase rate unchanged at 8.00 percent, as largely expected, but trimmed its Cash Reserve Ratio (CRR) by 25 basis points to 4.50 percent to help growth revive yet still maintain pressure on inflation.
The cut in CRR will inject some 170 billion rupees into the banking system, the RBI said in its mid-quarter policy review.
The RBI’s move comes on the heels of a flurry of reforms by the Indian government, which the central bank said had started to reverse negative sentiment. It added that steps to increase foreign direct investment should help capital inflows and productivity in the food supply chain.
“Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” the RBI said, adding: “As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations.”
In August India’s annual inflation rate rose to 7.5 percent, up from July’s 6.9 percent. The bank has said that it is comfortable with inflation of 5 percent.
The RBI cut its repo rate by 50 basis points in April, a move it described as front-loading on expectations for fiscal policy support and supply-side initiatives. However, these expectations did not materialize and inflation did not fall significantly.
India’s economic growth has been slowing the last two years, and in the second quarter the economy expanded 0.8 percent from the first quarter, for a 5.5 percent annual growth rate, only slightly improved from the first quarter’s record low of 5.3 percent.
But the RBI said the government’s policy actions should stimulate growth and monetary policy would reinforce the positive impact of these actions while maintaining the focus on inflation.
The RBI said global growth was weakening in the third quarter of 2012 and Europe’s weak economy poses significant downside risks to the global economy. The European Central Bank and the U.S. Federal Reserve have responded with liquidity measures.
“While these measures have certainly mitigated short-term growth and financial risks, they will also exert pressure on global asset prices, and particularly, commodity prices,” the RBI said.
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