RBI keeps repo, reverse repo, CRR and SLR unchanged
Moneylife Digital Team 16 December 2011

As correctly predicted by Moneylife, the central bank had kept repo, reverse repo, CRR and SLR rates unchanged and said that from now onward its actions would respond to the risks to growth

The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review on Friday, kept the repo and reverse repo rates unchanged at 8.5% and 7.5%, respectively. It also did not revise the cash reserve ratio (CRR), which stands at 6% and the statutory liquidity ratio (SLR) at 24%.

Analysts had opined that in view of the slowdown in the economy on account of rising interest rates and the global situation the central bank may take a pause this time. (Read...RBI may take a pause by keeping policy rates unchanged)

While accepting that there is deceleration in growth due to past monetary policy tightening and domestic policy uncertainties, the RBI, said, “From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.” 

“However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” the central bank said in a statement.
 
According to the RBI, liquidity conditions have remained in deficit during this fiscal year in consistent with the stance of its monetary policy. However, the deficit increased significantly beginning the second week of November 2011. The average borrowings under the daily liquidity adjustment facility (LAF) increased to around Rs89,000 crore during November-December (up to 15 December 2011) from about Rs49,000 crore during April-October 2011. The Reserve Bank conducted open market operations (OMOs) on three occasions in November-December 2011 for an amount aggregating about Rs24,000 crore to ease liquidity conditions.
 
Allaying the fears of stress in money market, the central bank said there are currently no significant signs of stress as the overnight call money rate are stable around the policy repo rate and liquidity facilities such as marginal standing facility (MSF) remain unutilised. It however, said that in view of the fact that borrowings from the LAF are persistently above the Reserve Bank's comfort zone, further OMOs will be conducted as and when seen to be appropriate.
 
 In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months.
 
WPI inflation moderated to 9.11% year-on-year (y-o-y) in November from 9.73% in October, slightly higher than market expectations due to sharp deceleration in food inflation and stable manufacturing inflation. However, non-food manufactured inflation (which the RBI refers as core inflation) increased in November to 7.9% from 7.6% in October due to an increase in the prices of metals (1.5% month-on-month or m-o-m), chemicals (0.4% m-o-m) and non-metal minerals (0.9% m-o-m).
 
For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the WPI, stood at 6.6% in the previous week. It was recorded at 10.78% in the corresponding period last year. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.
 
“Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation,” the RBI said in the statement.
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