RBI's Annual Monetary Policy Statement for the Year 2012-13 -17th April 2012
IV. Monetary Measures
45. On the basis of the current assessment and in line with policy stance outlined in Section III, the Reserve Bank announces the following policy measures.
46. It has been decided to:
reduce the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 8.5 per cent to 8.0 per cent with immediate effect.
Reverse Repo Rate
47. The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 7.0 per cent with immediate effect.
Marginal Standing Facility
48. In order to provide greater liquidity cushion, it has been decided to:
raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect.
49. Banks can continue to access the MSF even if they have excess statutory liquidity ratio (SLR) holdings, as hitherto.
50. The MSF rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 9.0 per cent with immediate effect.
51. The Bank Rate stands adjusted to 9.0 per cent with immediate effect.
Cash Reserve Ratio
52. The cash reserve ratio (CRR) of scheduled banks has been retained at 4.75 per cent of their NDTL.
53. The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.
54. Moreover, persistent demand pressures emerging from inadequate steps to contain subsidies as indicated in the recent Union Budget will further reduce whatever space there is. In this context, it must be pointed out that, while revisions in administered prices may adversely impact headline inflation, the appropriate monetary policy response to this should be based on whether the higher prices translate into generalised inflationary pressures. Although the likelihood of a pass-through depends on the strength of the pricing power in the economy, which is currently abating, the risk of a pass-through cannot be ignored altogether. Overall, from the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production.
55. On liquidity, conditions are steadily moving towards the comfort zone of the Reserve Bank, as reflected in the decline in banks’ borrowings from the LAF and the behaviour of money market rates. The increase in the MSF limit will provide additional liquidity comfort. However, should the situation change, appropriate and proactive steps will be taken with the objective of restoring comfort zone conditions.
56. The policy actions taken are expected to:
stabilise growth around its current post-crisis trend;
contain risks of inflation and inflation expectations re-surging; and
enhance the liquidity cushion available to the system.
Mid-Quarter Review of Monetary Policy 2012-13
57. The next mid-quarter review of Monetary Policy for 2012-13 will be announced through a press release on Monday, June 18, 2012.
First Quarter Review of Monetary Policy 2012-13
58. The First Quarter Review of Monetary Policy for 2012-13 is scheduled on Tuesday, July 31, 2012.
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