India’s central bank infuses more money into system (Lead)

January 24th, 2012 - 4:50 pm ICT by IANS  

Sensex Mumbai, Jan 24 (IANS) After keeping money supply under a tight leash for nearly two years to tame galloping inflation, India’s central bank Tuesday took steps to infuse more liquidity into the system by reducing a key rate that would help the industry get out of the current downturn.

The cash reserve ratio (CRR), the amount against deposits which commercial banks have to keep as liquid assets such as cash, has been lowered by 50 basis points to 5.5 percent from 6 percent and will be effective Jan 28.

“This step will release Rs.320 billion into the system,” Reserve Bank of India (RBI) Governor D. Subbarao said in a statement, soon after presenting the third quarter review of the monetary policy for the current fiscal year.

“The policy actions and the guidance are expected to ease liquidity conditions, mitigate downside risks to growth and anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation,” he added.

Industry welcomed the cut in CRR, but urged the central bank to start lowering interest rates in forthcoming reviews.

“This gives a clear signal that the RBI has recognized the challenges to growth owing to a weakening demand condition. The RBI needs to start reducing the repo rate as well in order to start the investment cycle, which has weakened,” said Chandrajit Banerjee, director general, Confederation of Indian Industry.

For the past two years, the central bank had been taking steps to curb liquidity with a mix of measures such as hikes in the short-term lending and borrowing rates to contain inflation that had risen to double digits with food inflation at 20 percent once.

But this has affected investments and increased the cost of capital to industry. As a result, industrial output has been largely sluggish in the current fiscal.

Cumulative factory output in the April-November period has been sluggish at 3.8 percent as against a growth of 8.4 percent in the like period of 2010.

In the mid-quarter review of the monetary policy in December, the central bank had hit the pause button on rate hikes while also indicating that it may ease the tight money policy regime if inflation were to moderate further.

“The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained,” Subbarao said in Tuesday’s policy statement.

India’s annual rate of inflation currently stands at a two-year low of 7.47 percent for December. Food inflation has been in the negative for the past three weeks, giving some comfort to policy-makers.

In the monetary policy review, the central bank also lowered its growth projection for the current fiscal to 7 percent from 7.6 percent earlier, while retaining its forecast on inflation at 7 percent by the end of March.

Markets too cheered the unexpected cut in CRR and the 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) soared past the 17,000-mark.

The next mid-quarterly review will be on March 15 and the monetary policy for 2012-13 will be announced April 17.

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