Highlights: RBI cuts CRR; rates unchanged

The Reserve Bank of India (RBI) left interest rates on hold on Tuesday but cut the cash reserve ratio for banks by 50 basis points, a move that eases tight liquidity in the banking system and underscores a policy shift from fighting inflation to reviving growth.

The RBI as expected left its policy repo rate unchanged at 8.50 percent for the second consecutive review, but lowered the CRR to 5.50 percent from 6.00 percent.

Following are highlights from the monetary policy statement:

POLICY MEASURES:

Repo rate retained at 8.50 percent.

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Reverse repo rate unchanged at 7.50 percent.

Cash reserve ratio cut to 5.50 percent from 6 percent.

PROJECTIONS:

Revises down its growth forecast for the current fiscal year ending in March to 7.00 percent from 7.6 percent with downward bias.

Retains end-March WPI inflation forecast at 7 percent.

Retains FY12 money supply growth projection at 15.5 percent.

Scales down 2011/12 non-food credit growth to 16.0 per cent from 18 percent.

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As a result of the reduction in the CRR, around 320 billion of primary liquidity will be injected into the banking system.

POLICY STANCE:

Balance of policy stance has shifted to growth, while ensuring inflationary pressures remain contained.

The large structural deficit in the system presents a strong case for injecting permanent primary liquidity into the system.

Maintain an interest rate environment to contain inflation and anchor inflation expectations.

Manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission.

Respond to increasing downside risks to growth.

EXPECTED OURCOMES:

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.

INFLATION, GROWTH:

Headline inflation may show some moderation, though remaining vulnerable to a variety of upside risks.

As the food subsidy bill is expected to rise, it will be prudent to fully deregulate diesel prices to contain both aggregate demand and trade deficit.

The increase in fiscal deficit could potentially crowd out credit to the private sector.

Slippage in the fiscal deficit has been adding to inflationary pressures.

The economy will exhibit a modest recovery in 2012/13, with growth being slightly faster than that during the current year.

Continuing uncertainty in the euro area will adversely affect Indian growth through trade, finance and confidence channels.

LIQUIDITY:

Liquidity tightened partly reflecting RBI's forex market operations and advance tax outflows around mid-December.

Structural liquidity deficit in the system has increased significantly, which could hurt the credit flow to productive sectors of the economy.

Persistence of tight liquidity conditions could disrupt credit flow and further exacerbate growth risks.