M A I N   N E W S

RBI boosts liquidity, FM says more reforms in the offing
* CRR cut, repo rate unchanged
* PC hopes for better fiscal consolidation by Oct 30
Sanjeev Sharma/TNS

New Delhi, September 17
Balancing inflation and growth concerns, the Reserve Bank of India (RBI) provided a moderate liquidity boost on Monday even as the government said more reforms to boost growth were in the offing.

The RBI responded with caution to the reforms booster by the government last week. It did not oblige with a cut in benchmark rates but cut the cash reserve ratio (CRR) by a moderate 25 basis points, thereby releasing Rs 17,000 crore liquidity into the system, in what many analysts believe is the start of the rate easing cycle.

Responding to the RBI action, Finance Minister P Chidambaram signaled that more reform measures were on the way. Chidambaram said he was not disappointed by the RBI policy and added that the government would be taking more steps between now and October 30.

“I am very confident that between now and October 30 the government is expected to take a number of additional policy measures and also lay out a plan of fiscal consolidation. The response of the RBI on October 30 will be far more supportive of growth,” Chidambaram said.

Expectations were high from the RBI following the surprise “big bang” announcements by the government last week to boost the momentum in the economy. The RBI, however, is caught in a situation where though growth is slowing and August inflation clocked a six-month high.

Explaining the stance, RBI Governor D Subbarao, in his monetary policy announced today, said, “As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations.” He added that while growth risks have increased, inflation risks remain. He stressed that concerted policy action on several fronts is required to take the economy to a higher growth trajectory.

RBI cut the CRR -- the portion of deposits that banks are required to keep with RBI -- by 25 basis points to 4.5 per cent while keeping the repo rate unchanged at 8 per cent. The increase in liquidity in the system may translate into some easing of loan rates as banks have recently been reducing deposit rates.

The BSE Sensex reacted a little to the disappointment from the RBI and shed some gains from the morning following the opening up of FDI in retail and aviation and hike in diesel prices to close up by 73 points at 18536 points, a 14-month high.

Tarun Kataria, CEO, Religare Capital Markets, said with inflation still uncomfortably high and the risk of rising inflationary expectations still elevated, this was the right rate outcome. “A CRR cut going into the festive season will be helpful. The announced reforms coupled with a possible rate cut over the next six months can prove a powerful catalyst for a rebound in investment spending,” he said.

Industry was left a little disappointed as it was expecting a cut in rates. The CII said the cut in CRR and additional liquidity in the system would help the current situation, where availability and cost of credit have been a challenge, particularly for the SMEs.

“However, given the slew of reform measures announced by the government, including the ones aimed at fiscal consolidation, the CII had hoped that the RBI would also move in favour of growth and cut repo rates”, it added. 

injecting Rs 17,000 crore

• The RBI cut the CRR, the portion of deposits that banks are required to keep with RBI, by 25 basis points to 4.5% while keeping the repo rate unchanged at 8%
• This will release Rs 17,000 crore liquidity into the system and may ease home and auto loan rates as banks have recently been reducing deposit rates
• The Sensex reacted and shed some gains only to close up by 73 points at 18,536 points, a 14-month high
• Industry was left a little disappointed as it was expecting a cut in rates