India Monetary Policy


India: Central Bank cuts cash reserve ratio, adopts dovish stance

January 24, 2012

At its latest policy meeting on 24 January, the Reserve Bank of India (RBI) left its key interest rates unchanged for a second consecutive month, with the repo rate remaining at 8.50% and the reverse repo rate at 7.50%, in a decision that was widely expected by the market. The Bank, however, lowered the cash reserve ratio by 50 basis points to 5.50%, in a move that will inject around 320 billion rupees (USD 6.4 billion) into the banking system. According to the Bank, ?inflation has broadly followed the projected trajectory and has shown moderation as expected? and, given that downside risks to growth have increased, ?the growth-inflation balance of the monetary policy stance has now shifted to growth?. The RBI also explained that liquidity conditions are still tight, therefore justifying its decision to lower the cash reserve ratio. Although the RBI reiterated that the cycle of interest rate increases has now peaked, monetary authorities stated that ?based on the current inflationary trajectory, it is premature to begin reducing the policy rate? and that ?a reduction in the interest rate will be conditioned by signs of sustained moderation in inflation?.


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