RBI leaves interest rates unchanged; cuts CRR by 0.25 percent

Mumbai  : The Reserve Bank of India (RBI) Monday kept key interest rates unchanged, disappointing millions of borrowers who were expecting cuts in EMIs, but cut the cash reserve ratio (CRR) that will release Rs.17,000 crore into the economy.

The CRR, the proportion of money banks are required to keep with the central bank, is reduced by 0.25 percent (or 25 basis points) to 4.50 percent. The new CRR rate will be effective from the fortnight Sep 22, 2012.

The CRR cut will release Rs.17,000 crore liquidity into the economy, the central bank said in the mid-quarter review of the monetary policy.

The central bank, however, kept interest rates unchanged saying inflation remained a big concern.

It kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also left intact at 7 percent.

In the policy review, the RBI said the main focus of monetary policy remains fighting inflation.

“As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations,” said RBI Governor D Subbarao.

“Containing inflationary pressures and lowering inflation expectations warrant maintaining the momentum of recent policy actions to step up investment, alleviate supply constraints, and improve productivity.”

Markets and the common people were expecting easing in rates by the central bank especially in view of the unexpected big-ticket reforms announced by the government last week.

Equated monthly installments (EMIs) on housing, auto and education loans will remain unchanged.

Finance Minister P Chidambaram said the government would take further steps in the next one and half month to bring more fiscal discipline.

“I am very confident that between now and Oct 30 since the government is expected to take a number of additional policy measures and also lay out the path of fiscal correction, the response of RBI on Oct 30 will be far more supportive of growth,” Chidambaram told reporters while reacting on the RBI policy review.

The RBI is scheduled to announce the next policy review Oct 30, 2012.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the RBI’s decision to cut CRR was a step in the right direction.

“It’s a step in the right direction. I welcome cut in CRR,” Ahluwalia said.

The policy review, the RBI pointed out that inflation has remained sticky at around 7.5 percent throughout the current financial year so far.

“Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky,” the central bank said.

India’s core inflation, based on wholesale prices, soared to 7.55 percent in August as compared to 6.87 percent in the previous month. The RBI considers 4-5 percent inflation level comfortable.

India Inc welcomed the cut in CRR and expressed hope that the central bank would cut rates in the October-end policy review.

“Additional liquidity in the system would help the current situation, where availability and cost of credit have been a challenge, particularly for the SMEs,” said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).

Banerjee, however, said industry was expecting a cut in repo and reverse repo rates, in view of the slew of reform measures announced by the government last week.

“Demand pressures according to the RBI have eased and therefore, a cut in headline rates is a reasonable expectation,” Banerjee said.

“We hope that the RBI continues with this stance and we look forward to a rate cut and repo rate cut in RBI’s second quarter review of monetary policy next month,” said R V Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI).