India: Central Bank cuts cash reserve ratio
September 17, 2012
At its last policy meeting on 17 September, the Reserve Bank of India (RBI) left the repo rate unchanged at 8.00% and the reverse repo rate at 7.00%, in a decision widely expected by the market. The Bank, however, surprise the market by cutting the cash reserve ratio by 25 basis points to 4.50%, effective 22 September. The move will inject 170 billion rupees (USD 3.1 billion) into the financial system. According to the RBI, global economic activity has been weakening in the third quarter, causing world trade to slow considerably. Domestically, although GDP growth picked up somewhat in the first quarter of the current fiscal year, economic momentum remains sluggish across all sectors, particularly in industry. In addition, the agricultural sector has also suffered from below-average rains this monsoon season. Regarding price developments, the Bank noted that inflation remains elevated and that "supply constraints and rupee depreciation are imparting pressures on prices, rendering them sticky", while adding that international crude prices may rise further, driven up by higher global liquidity. Against this backdrop, the RBI concluded that "while growth risks have increased, inflation risks remain", while adding that persistent inflationary pressures combined with risks emerging from the fiscal and current account deficits "constrain a stronger response of monetary policy to growth risks". The next policy meeting is scheduled for 30 October.