RBI Cuts CRR by 50 Points, Injects Rs. 32,000 crs Liquidity in Economy to Push Growth

[RBI Press Release dated 24^th January 2012]

RBI has decided to-

· Cut the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL). This will be effective the fortnight beginning January 28, 2012.

· This reduction in the CRR will inject around ` 320 billion of primary liquidity into the system.

There is no change in the policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility (LAF) remains at 8.5 per cent.

Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, will continue at 7.5 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.5 per cent.

Considerations Behind the Policy Move

Three major considerations have informed the decision to reduce the CRR.

First, growth is decelerating. This reflects the combined impact of several factors: the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties. While some slowdown in the growth of demand was the expected outcome of our earlier monetary policy actions to contain inflation, at this juncture, risk to growth has increased.

Second, even as headline WPI inflation is moderating, it is coming largely from a sharp deceleration in prices of seasonal food items. In respect of other key components, particularly protein-based food items and non-food manufactured products, inflation remains high. Moreover, there are upside risks to inflation from global crude oil prices, the lingering impact of rupee depreciation, and slippage in the fiscal deficit.

The third consideration that informed our decision is that liquidity conditions have remained tight beyond the comfort zone of the Reserve Bank. Although the Reserve Bank has conducted open market operations, and injected liquidity of over ` 700 billion, the structural deficit in the system has increased significantly. This could hurt credit flow to productive sectors of the economy. The large structural deficit in the system presented a strong case for injecting permanent primary liquidity into the system.