CRR cut to pump fresh Rs 17,500 crore into System

With inflationary pressures still persisting in the economy, the Reserve Bank of India on Tuesday decided to leave the repo and reverse repo rates unchanged at 8.0 per cent and 7.0 per cent respectively.  Repo rate is the rate at which RBI lends to banks.

To inject further liquidity into the system, the central bank reduced cash reserve ratio (CRR), the portion of deposits that the banks are required to keep with RBI, by 25 basis points to 4.25 per cent from 4.5 per cent. This will inject `17,500 crore of additional liquidity into the banking system.

Explaining the rationale behind the move to cut CRR and keep policy rates unchanged, RBI Governor D Subbarao said it was driven primarily by the concern over rise in inflation, which remained sticky at above 7.5 per cent on a year-on-year basis through the first half of 2012-13.

In September, headline inflation surged to a 10-month high of 7.81 per cent on the back of hike in prices of diesel, food items and other commodities.

Going forward, Subbarao held out the hope of a possible reduction in interest rates. “The policy stance anticipates the projected inflation trajectory, which indicates a rise in inflation over the next few months before easing in the last quarter. While there are risks to this trajectory, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year,” he said.

Commenting on the monetary policy, Indian Overseas Bank Chairman and Managing Director M Narendra said that RBI has made available `17,500 crore for meeting the commercial needs of the ensuing busy season.

“Banks are expected to channel these funds  to retail production and consumption taking advantage of the festive season. However, banks are unlikely to tweak interest rates in the immediate future considering the mounting pressure on profitability from rising NPAs.”