RBI’s surprise move will infuse Rs. 320 billion into the banking system to ease the liquidity pressure faced by banks. The central bank has revised the GDP growth for 2011-12 downwards to 7 percent and cautioned that slippage in the fiscal deficit is a threat to the economy.
Governor Dr. D. Subbarao of RBI slashed the cash reserve ratio (CRR) by 50 basis points from 6% to 5.50%, effective 28 January, in the third quarter review of monetary policy 2011-12. However, the repo rate and the reverse repo have been kept unchanged at 8.5% and 7.5%, respectively. The CRR cut will lead to an infusion of Rs. 320 billion into the banking system which will ease the liquidity problem faced by the banks.
He added that it was premature to begin reducing the policy rate based on the current inflation trajectory; even as inflation remains high, despite moderation, downside risks to growth have increased. Slippage in the fiscal deficit has been adding to inflationary pressures and it continued to be a risk for inflation. With food subsidy bill expected to rise, it would be prudent to fully deregulate diesel prices to contain both aggregate demand and trade deficit.
According to Sunil Mehta, Country Head, AIG India, the CRR reduction is a strong reinforcement of RBI’s commitment to future easing of policy rates if the inflation trajectory is in line with the central bank’s projections. He further added that it must be recognized that there has to be strong, cohesive and coordinated action between the government and the central bank, particularly, in an environment where the country faces vulnerability on account of potential imported inflation.
Varun Goel, Head-Equity PMS, Karvy Private Wealth said, “We believe that this is the beginning of monetary easing. The biggest beneficiaries of this reversal in policy would be interest rate-sensitive sectors like banks, autos and capital goods.” He also added that several PSU banks which were badly beaten down and look extremely attractive from a valuation perspective.
