Reserve Bank of India Appears to Pre-Announce Easier Stance Next Quarter

December 18, 2012

The Reserve Bank of India did not cut its 4.25% cash reserve requirement (CRR) as widely expected after its review of monetary policy.  Indian growth slowed below 6% this year, and inflation has moved lower recently.  The CRR had been reduced by 25 basis points each in September and October and, before that, by 50 bps last January and 75 bps in March, but officials have given little ground in reducing the repo and reverse repo rates.  A total of thirteen increases in those key rates had cumulated to 400 basis points between March 2010 and October 2011.  Since cresting at 8.5% and 7.5%, they had been cut just once, dropping 50 bps in April to their present levels of 8.0% and 7.0%.

The statement released today, however, sent a mixed message, for while not reducing CRR, officials identified an inflection point in priorities, switching from the containment of inflation to a more growth-supporting stance over coming months.

Headline inflation has been below the Reserve Bank’s projected levels over the past two months. The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth as stated in the SQR, thereby preparing the ground for further shifting the policy stance to support growth. Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks.

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

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