India: Central Bank leaves repo rate unchanged, cuts cash reserve ratio
October 30, 2012
At its last policy meeting on 30 October, 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 broadly expected by the market. The Bank, however, cut the cash reserve ratio by 25 basis points to 4.25%, effective 3 November. According to the RBI, the move will inject 175 billion rupees (USD 3.2 billion) into the financial system. The Central Bank reiterated that economic activity in both emerging and developed economies has been weakening. At a domestic level, although GDP growth picked up somewhat in the first quarter of the current fiscal year, risks have increased owing to lower consumption and investment as well as by weakening business and consumer sentiment. Regarding price developments, the Bank noted that wholesale inflation "remained sticky", while consumer prices inflation is still high reflecting food price pressures. According to the RBI, inflation is expected to rise somewhat in the third quarter of the current fiscal year before starting to moderate in the fourth quarter. Against this backdrop, the Bank concluded that downward risks to growth stemming from the global macroeconomic environment "now seem likely to be stronger than previously though". As a result, the RBI maintained a dovish tone regarding its future policy decisions, stating that "as recent policy initiatives by the government start yielding results in terms of revitalising activity, they will open up space for monetary policy to work in concert to stimulate growth".