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You are here : IndiaNotes >> Research & Analysis >> Economy Watch >> Monetary Policy

First-Quarter Monetary Policy Review July 2012: RBI unmoved

Reliance Securities | Published: 01 Aug, 2012  | Source : ValueNotes.com | Follow Author | Add to my Favourites


- The Reserve Bank of India (RBI) has kept its policy rate under the liquidity adjustment facility (LAF) unchanged at 8.0%
- Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0%, and the marginal standing facility (MSF) rate and the bank rate would remain at 9.0%
- Also, the cash reserve ratio (CRR) of scheduled banks is unchanged at 4.75%, however, the statutory liquidity ratio (SLR) of scheduled commercial banks has been reduced to 23% from 24% of their net demand and time liabilities (NDTL) with effect from August 11, 2012. However, since most of the banks under Reliance Securities' coverage have 26-28% SLR, the change in SLR by RBI would have negligible impact

RBI Guidance

- Inflation: Inflation control remains the primary focus of monetary policy. In the current scenario, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth. Given the impact of deficit monsoon on food prices coupled with the pass-through of rupee depreciation to imports and embedded risks of suppressed inflation, there remains an upward pressure on overall inflation. Hence, the baselineWPI inflation is raised to 7% from 6.5%.

- GDP: RBI had projected GDP growth for 2012-13 at 7.3% on the assumption of a normal monsoon and improvement in industrial activity. Given the weak industrial activity and global slowdown, the growth in services sector is also expected to be sluggish. Hence, RBI has lowered the GDP growth projection to 6.5%for 2012-13.

- Liquidity: To provide free-flowing credit to productive private sectors, RBI lowered the SLR to 23% and has assured continued support via OMOs.

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RBI has left rates unchanged on the back of increased inflationary expectations in the light of weak monsoon and higher food and retail prices. Additionally, Government’s inaction in terms of fiscal consolidation and infrastructural bottlenecks in coal, minerals and power may exert upside pressure on non-food manufactured products inflation. Having said that, RBI has reiterated support for sustainable liquidity and growth path going forward. Thus, RBI would stand ready to respond to any such shocks swiftly, using all available instruments.

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