RBI policy review: Key Highlights

The Reserve Bank of India, on Tuesday, left key interest rates untouched but cut cash reserve ratio or CRR by 0.5 per cent to 5.5 per cent..Here are the highlights.Key points.RBI cuts CRR by 50 bps to 5.5 per cent CRR cut effective beginning 28th Jan 2012 CRR cut will infuse Rs 32,000 crore liquidity in systemRepo Rate retained at 8.5 per cent Reverse Repo rate remains unchanged at 7.5 per cent Marginal Standing Facility stands at 9.5 per cent Bank Rate retained at 6 per cent .Growth Outlook.FY12 GDP growth revised downward from 7.6 per cent to 7 per cent Downside risks have increased since October even as inflation remains elevated There is increased global uncertainty, weak industrial growth, slowdown in investment Agricultural prospects look buoyantSlower industrial growth will impact services sector growth Economy will exhibit modest recovery in 2012-13.Guidance.Growth – Inflation balance of monetary policy stance shifted to growthCut in CRR to address structural pressures on liquidityBased on current inflation, premature to begin reducing policy rates RBI will be constrained from lowering policy rate in absence of fiscal consolidationReduction will be conditioned by signs of sustainable moderation in inflation CRR reduction reinforces guidance that future rate actions will be towards lowering them Timing and magnitude of future actions contingent on various factorsPolicy actions to induce investment & address supply bottlenecks critical Fiscal slippage poses significant threat to inflation management Fiscal slippage poses significant threat to macroeconomic stability Union budget must begin process of fiscal consolidation Prudent to fully deregulate diesel prices to contain aggregate demand & trade deficit.Inflation.Food inflation has moderated more than anticipated Benefit offset by lower moderation in manufactured goods inflationBaseline projection for WPI inflation retained at 7 per cent Rupee depreciation, suppressed inflation in preventing downward revision of inflationInflation will remain vulnerable to variety of upside risks.Fiscal Worries.Gross fiscal deficit for FY12 will overshoot budget estimate substantiallyFiscal deficit could potentially crowd out credit to the private sector Fiscal slippages adding to inflationary pressures & continue to pose a risk.Liquidity.Liquidity conditions have remained beyond comfort zoneStructural deficit in the system has increased significantlyStructural deficit could hurt credit flow to productive sectors Structural deficit presents a strong case for injecting permanent liquidity.Global Risks.Sovereign debt concerns in Eurozone pose a major downside risk to growth Uncertainty will adversely affect Indian growth through trade Slowing capital flows raises concerns about current account deficit.Credit & Deposit Growth.Credit offtake has been below projected trajectory Nonfood credit growth scaled down to 16 per cent versus 18 per cent Money supply growth projection for FY12 retained at 15.5 per cent

RBI policy review: Key Highlights

S Panse, ED of Vijaya Bank said that the cost of funds will get reduced and the liquidity constrains will ease slightly due to a cut in CRR.

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