Inflation uppermost on its mind, the Reserve Bank of India on Monday refrained from lowering key rates and restricted itself to a token 25-basis-point cut in the amount of cash that banks need to park with it. After the barrage of reform measures unleashed by the Government last week, the RBI’s move was seen as a calibrated response.

The reduction in the the Cash Reserve Ratio, to 4.50 per cent from 4.75 per cent beginning September 22 fortnight, will release about Rs 17,000 crore into the banking system.

This could lead to a cut in lending rates by banks.

M. D. Mallya, Chairman and Managing Director of Bank of Baroda, called the CRR cut a sentiment booster. The resultant liquidity infusion will slightly bring down the need for mobilising deposits, thereby bringing down the cost of funds. In turn, lending rates could come down with a lag effect, he said.

Limited wiggle room

The strong inflationary pressure did not allow the central bank enough wiggle room to match the big-bang announcements made by the Government last week for fiscal consolidation and attracting foreign direct investment (FDI).

The Government’s announcements would reduce the fuel subsidy bill, hasten sale of stake in public sector enterprises, and open the doors to FDI in multi-brand retail, aviation and non-news broadcasting.

But, according to the central bank’s Mid-Quarter Monetary Policy Review, as the pass through of the recent hike in diesel prices/rationalisation of cooking gas subsidy remains incomplete, there will be pressure on inflation in the short term. Moreover, crude oil prices could be driven up further by global liquidity.

The RBI said that the current situation of persistent inflationary pressures alongside risks emerging from current account and fiscal deficits constrain a stronger monetary policy response to address risks to growth.

Justifying its stance to hold the repo rate (the interest rate at which banks borrow from the central bank) at 8 per cent, the RBI said it front-loaded policy rate reduction of 50 basis points in April.

The expected fiscal policy support for inflation management alongside supply-side initiatives to address the dip in investment and growth had not come and inflation remained well above 7 per cent.

Dangles hope of a rate cut

The central bank, however, held out the hope of a rate cut by stating that as government’s policy actions to stimulate growth materialise, monetary policy will reinforce the positive impact of these actions while maintaining its focus on inflation management.

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