RBI cuts repo rate by 0.25%; leaves CRR unchanged
MUMBAI, MAY 3:
The Reserve Bank of India today cut its key repo rate by 25 basis points to 7.25 per cent.
But the Cash Reserve Ratio or the portion of deposits that banks park with RBI (without any compensation) remains unchanged at 4 per cent.
In its Macroeconomic and Monetary Developments report, released on the eve of the policy, RBI had sounded quite hawkish and reiterated that there was limited space for monetary policy action in the coming days.
‘Policy recalibration’
Decoded, that meant no rate cuts for now. Instead, RBI was probably keeping the markets guessing by saying that a “policy recalibration’’ could happen in either direction — which meant even a hike — if local and overseas conditions warranted it.
In line with market expectations, RBI did cut the repo rate today. Stock markets reacted positively to the announcement.
The BSE Sensex which fell to 19,555 points just before the monetary policy announcement, recovered to about 19,689 points a few minutes after the announcement.
PTI reports:
RBI said that there would be modest improvement in the country’s economic growth to 5.7 per cent in the current fiscal against the decade’s low of 5 per cent in 2012-13.
Justifying the stance, RBI Governor D. Subbarao said the “monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment’’.
Upside risks to inflation
The upside risks to inflation, which cooled to a three-year low in March, “still remain significant” in the near-term on suppressed inflation on the energy front, he said.
“Overall, the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamics yields little space for further policy easing,” he said.
Liquidity deficit
The decision to leave the CRR unchanged seems to have been driven by an improvement in liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared with Rs 1.8 lakh crore late last fiscal.
RBI expects inflation to hover broadly around the 5.5 per cent mark in the current fiscal and said that it will deploy “all instruments at command” to bring it down to 5 per cent by March next year.
Cobrapost sting
Referring to the Cobrapost sting on the country’s top three private banks allegedly helping money laundering, the central bank said the ongoing investigations have underlined the need for better regulatory compliance by banks.
Even though factors like lower commodity prices and narrowing fiscal deficit would help stem inflation, RBI said the “upside risks to inflation are still significant in the short-term” in view of supply imbalances, correction in administrative prices of fuel and rising minimum support price of crops.
Given these factors, “monetary policy cannot afford to lower its guard against the possibility of resurgence in inflation pressures’’, Subbarao said.
Current account deficit
Describing the widening current account deficit and its financing as the biggest threat to monetary policy, RBI warned that growth would slip if governance is not improved and supply constraints are not unlocked.
The central bank expects non-food credit growth to pick up marginally to 15 per cent in 2013-14 from 14 per cent achieved in the previous fiscal and deposit mobilisation to be flat at 14 per cent.
There were a slew of measures on the regulation of banks and non-bank entities.
Regulatory compliance
RBI said its probe into the Cobrapost sting allegation have revealed the need for better adherence to regulatory compliance by banks as some aberrations have been found.
It also said that banks are not carrying out customer due diligence as per requirements while marketing and distributing third-party products and said that guidelines with remedial action regarding the same will come later.
Referring to customer services, it asked banks to stop differential treatment to home-branch and non-home branch customers, apart from asking them to price retail loans at uniform rates.
With the falling gold prices making lenders uncomfortable, it also asked banks not to lend against gold coins above 50 grams.
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