By IANS,
Mumbai: Departing from its two-year-old tough monetary policy, India’s central bank released Rs.32,000 crore (Rs.320 billion/$6 billion) into the country’s banking system to incrrease liquidity in the economy to revive growth.
The Reserve bank of India cut the cash reserve ratio (CRR), the amount of deposits commercial banks need to set aside as reserves, by 50 basis points to 5.5 percent from 6 percent, effective from Jan 28.
“This step will release Rs.320 billion into the system,” RBI Governor D. Subbarao said soon after presenting the third quarter review of the monetary policy for the current fiscal year.
“The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained,” he added.
The government and the industry welcomed the move. Finance Minister Pranab Mukherjee said the cut in CRR would help address the money market liquidity situation.
The industry on its part urged the central bank to start lowering interest rates in forthcoming reviews.
“The RBI needs to start reducing the repo rate as well in order to start the investment cycle, which has weakened,” said Chandrajit Banerjee, director general, Confederation of Indian Industry.
For that to happen, the RBI Governor said the government had to manage the unweildy fiscal deficit and address supply constraints in food and infrastructure.
“There is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation,” said Subbarao.
“The forthcoming union budget must exploit the opportunity to begin this process in a credible and sustainable way.”
Markets, however, cheered the unexpected cut in CRR. The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) soared past the 17,000-mark, though it slipped a tad at close.
For the past two years, the central bank had been taking steps to curb liquidity with a mix of measures such as hikes in the short-term lending and borrowing rates to contain inflation that had risen to double digits with food inflation at 20 percent once.
But the measures affected investments and increased the cost of capital to the industry. As a result, industrial output has been largely sluggish in the current fiscal.
Cumulative factory output in the April-November period has been tardy at 3.8 percent as against a growth of 8.4 percent in the like period of 2010.
“The policy actions and the guidance are expected to ease liquidity conditions, mitigate downside risks to growth and anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation,” Subbarao said in Tuesday’s policy statement.
In the monetary policy review, the central bank also lowered its growth projection for the current fiscal to 7 percent from 7.6 percent earlier, while retaining its forecast on inflation at 7 percent by the end of March.
The next mid-quarterly review will be on March 15 and the monetary policy for 2012-13 will be announced April 17.