Furthering the over two-year-old anti-inflationary posture, Reserve Bank of India (RBI), shockingly this time around also preferred to sacrifice growth over inflation and left the key cash reserve ratio (CRR) and policy repo rate untouched at 4.75% and 8% respectively, in its mid-quarter monetary policy review. The Reserve Bank had frontloaded the policy rate reduction only in April with a cut of 50 basis points. Consequent, to this standstill stance, the reverse repo rate under the LAF will remain unchanged at 7% and the marginal standing facility (MSF) rate and the Bank Rate at 9%. However, the central bank of India to further augment liquidity and encourage banks to increase credit flow to the export sector, increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, a move which will potentially release additionally liquidity of over Rs 300 billion, equivalent to about 50 basis points reduction in the CRR.
Uncomfortable with soaring headline inflation, more importantly the Retail Inflation measured as Consumer price index (CPI) inflation, which entered double digits of 10.36% in April from 9.38% in March, the RBI in light of deteriorating global macroeconomic and financial conditions, opted to battle out the inflation demon. During 2011-12, headline WPI inflation rate moderated from a peak of 10% in September 2011 to 7.7% in March 2012. However, during 2012-13 so far, provisional data suggest that it inched up from 7.2% in April to 7.6% in May, driven mainly by food and fuel prices. 'Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,' the RBI reported in its mid-quarter policy review. Rupee’s fall, which counterbalanced the positive impact that the wholesale prices index, could have given the decline of the international crude prices, also emerged to be one of the reason behind the standstill policy of RBI.
The central bank, to tackle inflation, raised its key lending rate 13 times since March 2010 but appeared reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April. However, RBI in its forward guidance has clearly stated that the evolving growth-inflation dynamic would continue to influence its decision-making. 'Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,' the RBI said in its statement.
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