ImpThe Reserve Bank of India on Tuesday left its key policy rate unchanged in its second quarter (July-September) monetary policy. However, it cut cash reserve ratio (CRR) by 25 basis points to 4.25%. CRR is the portion of deposits banks are mandated to keep with the RBI.With the CRR cut, the central bank will infuse Rs 17,500 crore liquidity into the system. Repo, the policy rate at which banks borrow money from the regulator remains at 8% while reverse repo, used to lend money to RBI is at 7%.The reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth.The central bank also revised its growth outlook for 2012-13.
RBI estimated GDP growth at 5.8% as against 6.5% earlier. At the same time, it upped the headline inflation projection to 7.5% compared with 7% indicated in July. RBI expects it to rise somewhat in October-December before beginning to ease in Jan-March.An appreciating rupee too is likely contain inflation by reducing the cost of imports especially of commodities.While prospects for agriculture appear resilient, the overall outlook for economic activity remains subdued. Looking ahead, the path of inflation will be shaped by two sets of counteracting forces. RBI observes that projected inflation which indicates a rise till December before it eases in the December quarter are bearing certain risk elements. With this, it apparently pinned hopes of any policy rate cut before the fourth quarter (Jan-March).In order to ensure availability of funds, RBI slashed CRR by 175 bps so far in 2012. In July-September quarter, banks net borrowings through RBI window (read Liquidity Adjustment Facility) were at Rs 48,600 crore. That was within the range of RBI’s comfort zone i.e. 1% of net demand and time liabilities.However, liquidity conditions tightened in October. According to RBI, it was mainly on account of the build-up in the government’s cash balances and the seasonal increase in currency demand. Consequently, the average LAF borrowings rose to Rs 87,100 crore during October 15-25 surpassing RBI’s 1% benchmark level.