RBI adopted a dovish policy: HDFC Bank official

Last Updated: Tue, Jan 24, 2012 13:30 hrs

Chennai, Jan 24 (IANS) The 50 basis points cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) Tuesday in its third quarter review of monetary policy shows it has adopted a "dovish policy" than what was anticipated, said a senior official of HDFC Bank Ltd.

"The RBI has adopted a more dovish policy stance than anticipated by most in the markets by cutting the CRR by an aggressive 50 basis points to 5.5 percent. Recent comments by senior RBI officials seemed to emphasize that the CRR is not only a liquidity management tool but also an anti-inflationary instrument. A cut would, therefore, prima facie mean an easing of the vigil on prices," said Abheek Barua, chief economist at HDFC Bank.

The CRR is the amount against deposits which commercial banks have to keep as liquid assets such as cash.

"The fact that the RBI governor chose to go the whole hog and cut the CRR not just by a token 25 bps but by a full 50 bps despite the fact the December core inflation print was a rather high 7.7 percent is an indication of the RBI's growing concerns over liquidity and growth," he said.

According to Barua, the RBI has conveyed that CRR cut is not a liquidity enhancing move but a signal instrument that more easing lies ahead.

The RBI's concerns over growth are clearly visible in its revised FY12 gross domestic product (GDP) growth forecast from 7.6 percent earlier to 7 percent and non-food credit growth down from 18 to 16 percent for March 2012.

However, while rate cuts are certain, it is the timing and pace of these rate cuts that are moot. There area number of riders that the RBI throws in and it is important to take account of them in trying to predict the future trajectory of rates, Barua said.

He believes cuts in repo rate are in the offing but it may not happen before April when inflation shows signs of easing more sustainably.

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