Reserve Bank of India: Balancing Priorities

September 17, 2012

After a mid-quarter policy review, monetary officials in India cut the RBI’s cash reserve requirement to 4.75% from 5.0% but left its key 8.0% repo rate for borrowing and 7% reverse repo rate for deposit-taking unchanged.  A statement released by the central bank predicts greater “pressures on liquidity over the next few weeks,” notes moves by the Fed and ECB to augment liquidity, and estimates that its cut in the reserve ratio will unleash 170 billion rupees of liquidity.  In the first calendar quarter of 2012, the RBI reserve requirement was cut by 50 bps in January and 75 bps in March, and in April the repo and reverse repo rates were sliced by 50 bps each in the first cut of them in three years. 

There have been no more interest rate changes since April, however, because of the downward stickiness of inflation. 

In April, the Reserve Bank implemented a front-loaded policy rate reduction of 50 basis points on the expectations of fiscal policy support for inflation management alongside supply-side initiatives for addressing the deceleration of investment and growth. As these expectations did not materialize and inflation remained firmly above 7.5 per cent, the Reserve Bank decided to pause in its policy easing. …The primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations. In this context, the Government’s recent actions have paved the way for a more favorable growth-inflation dynamic.

Comments in today’s statement about global and Indian growth trends are somewhat downbeat.  With the right additional fiscal initiatives and some better inflation news, officials would presumably be in position to cut interest rates without putting the rupee and expected inflation at undue risk.  The next interest rate announcement is scheduled for October 30.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: ,


Comments are closed.