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RBI's Policy Stance: Will Choosing Practicality Over Sentimentality Help?

| 11/1/2012 9:00 PM Thursday

The Reserve Bank of India (RBI) announced its second quarter review of the monetary policy 2012-13. This has turned out to be contrary to what was expected. The central bank left the repo and the reverse repo rates unchanged at 8 per cent and 7 per cent respectively. However, it again slashed the Cash Reserve Ratio (CRR) by another 25 basis points, bringing it to 4.25 per cent. This would effectively inject around Rs 17500 crore into the system, helping the banking sector to resolve its liquidity issues.

It has also revised the GDP growth estimate downward by 70 basis points to 5.8 per cent for FY2013 and the inflation estimate upwards by 50 basis points to 7.5 per cent for March 2013. In April 2012, the RBI had forecasted the GDP growth to come in at 7.3 per cent and inflation to be at around 6.5 per cent, which was later revised downwards to 6.5 per cent and 7 per cent respectively in July. This is the second revision of the key indicators, which clearly reflects the RBI’s cautious stand on the economic front.

The deposits growth estimate for FY2013 has been left unchanged at 15 per cent but that for advances growth has been lowered by 100 basis points to 16 per cent. According to the report, the growth of deposits decelerated with a moderation in interest rates, especially the term deposit rates. On the other hand, a slowdown in investment demand, especially with regard to infrastructure, and lower absorption of credit by the industry in general has been hurting credit growth. During the first half of 2012-13, the modal deposit rates of scheduled commercial banks declined by 13 basis points across all maturities and the modal base rate of banks also declined by 25 basis points.

Policy Stance (%)
Repo Rate 8
Reverse Repo Rate 7
Cash Reserve Ratio 4.3
Bank Rate  9
RBI's Estimates For March 2013 (%)
GDP Growth 5.8
WPI Inflation 7.5
Deposit Growth 15
Non-Food Credit Growth  16

 

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