Third Quarter Review of Monetary Policy 2011-12
-Announced on the 24th January 2012
IV. Monetary Measures
50. On the basis of current assessment and in line with the policy stance outlined in Section III, the Reserve Bank announces the following policy measures:
Cash Reserve Ratio
51. It has been decided to:
reduce the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL) effective the fortnight begining January 28, 2012.
52. As a result of the reduction in the CRR, around Rs320 billion of primary liquidity will be injected into the banking system.
53. The policy repo rate under the liquidity adjustment facility (LAF) has been retained at 8.5 per cent.
Reverse Repo Rate
54. The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands at 7.5 per cent.
Marginal Standing Facility (MSF) Rate
55. The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands at 9.5 per cent.
56. The Bank Rate has been retained at 6.0 per cent.
57. In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance. In the two previous guidances, it was indicated that the cycle of rate increases had peaked and further actions were likely to reverse the cycle. Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation. However, the persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks. In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them.
58. However, it must be emphasised that the timing and magnitude of future rate actions is contingent on a number of factors. Policy and administrative actions, which induce investment that will help alleviate supply constraints in food and infrastructure, are critical. Initiatives to narrow skill mismatches in labour markets will help ease the pressure on wages. The anticipated fiscal slippage, which is caused largely by high levels of consumption spending by the government, poses a significant threat to both inflation management and, more broadly, to macroeconomic stability.
59. Strong signs of fiscal consolidation, which will shift the balance of aggregate demand from public to private and from consumption to capital formation, are critical to create the space for lowering the policy rate without the imminent risk of resurgent inflation. In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending. The forthcoming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.
60. The policy actions and the guidance in this Statement given are expected to:
Ease liquidity conditions.
Mitigate downside risks to growth.
Continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.
Mid-Quarter Review of Monetary Policy 2011-12
61. The next mid-quarter review of Monetary Policy for 2011-12 will be announced through a press release on Thursday, March 15, 2012.
Monetary Policy 2012-13
62. The Monetary Policy for 2012-13 will be announced on Tuesday, April 17, 2012.
Macroeconomic and Monetary Developments: Third Quarter Review 2011-12 ...Click Here
Highlights of Third Quarter Review of Monetary Policy 2010-11....Click Here
RBI CREDIT AND MONETARY POLICIES (1999-2012)