November 2012

The RBI on 30 October 2012 left interest rates unchanged but had cut the cash reserve ratio for banks and indicated that it is going to cut monetary policy further in the January-March 2013 quarter, with inflation remaining a near-term concern. The decision of leaving the policy repo rate unchanged at 8.00 percent, which is at the same level for the past six months was in line with forecasts in a recent review of macroeconomic and monetary developments by Reuters. Also, the reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remained at 7 percent. The new rates will be effective 3 November 2012. The expectations for a rate cut had grown after India’s finance minister P. Chidambaram on 29 October 2012 outlined a plan to trim the country’s hefty fiscal deficit. D. Subbarao mentioned in his quarterly policy review that with the reduction in inflation, there is an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory. The RBI, however, cut the Cash Reserve Ratio (the amount parked by banks with the RBI) by 25 basis points from 4.5 per cent to 4.25 per cent. This measure is expected to infuse Rs 17,500 crore liquidity into the banking system. The RBI cut its GDP growth forecast for Asia’s third-largest economy to 5.8 per cent for the current fiscal year, from 6.5 per cent previously, and increased its projection for headline inflation in March to 7.5 per cent, from 7 per cent earlier.

Repo rate: The rate at which banks borrow f from RBI. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.

Reverse Repo rate: The rate at which the RBI borrows money from commercial banks.

Cash Reserve Ratio (CRR): the amount of total deposits that banks are required to keep with the central bank. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system.

Highlights of the RBI Quarterly Monetary Policy Review:

• Repo rate remain unchanged at 8 percent

• CRR decreased by 0.5 Percent, coming down to 4.5 to 4.25 percent

• Reverse repo rate remain unchanged at 7 Percent

• GDP growth forecast cut down to 5.8 per cent for the current fiscal year 2012-13 from 6.5 percent.

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