Monday, October 29, 2012

India holds rate, cuts CCR by 25 bps, sees further easing

    India's central bank held its benchmark repurchase rate steady at 8.0 percent but cut its Cash Reserve Ratio (CCR) by 25 basis points to 4.25 percent, and held out the promise of further policy easing in the fourth quarter of the 2012/13 year.
   The Reserve Bank of India (RBI), which also cut its CCR by 25 basis points last month, said in a statement that the reduction in CCR would inject some 175 billion rupees into the banking system, and was "intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth."
    The RBI said it expects inflation to rise further and then ease in the last quarter.
    "While risks to this trajectory remain, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13," it said, adding that further easing would also be "conditioned by the evolving growth-inflation dynamic."
     The cut in the CCR - the percentage of deposits that banks keep with the central bank - was expected by many economists while some had also been looking to the RBI to cut its repo rate.
    The RBI said risks to global growth had risen and could well overwhelm to positive effects of enhanced liquidity by central banks in advanced economies.

    And with commodity prices still at elevated levels, the risks of liquidity-driven prices increases remain significant, the RBI warned.
    "Even as this process moves forward, the months ahead will be a period of heightened uncertainty for the global economy," it said.
    Amidst this slowdown and uncertainty, the RBI said the Indian economy remained sluggish, held down by stalled investment, weakening consumption and declining exports, though recent government measures had improved sentiment.
    India's economy expanded by 0.8 percent in the second quarter from the first quarter, for an annual growth rate of 5.5 percent, up from 5.3 percent in the first quarter.
    But inflation sped up to an annual 7.8 percent from 7.6 percent in August. The bank is comfortable with inflation around 5 percent.
    Despite a moderation in growth, the RBI said inflationary pressures continued and India is an exception to the global trend of low inflation, underscoring the role of domestic structural factors.
    "Consequently, managing inflation and inflation expectations must remain the primary focus of monetary policy," the RBI said.

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