RBI does its bit, cuts repo & CRR

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SummaryThe Rs 18,000 crore extra cash with banks will make loans cheaper for all.

at a shockingly high 54.4% of GDP in Q2FY13 — Subbarao said there was also concern on the kind of flows that were financing the deficit.

The central bank, which has pared its inflation projection significantly for March 2013 to 6.8% from 7.5%, expects the price rise to gain some momentum next year before tapering off since the impact of the hike in diesel prices would kick in. Subbarao observed that while headline and core inflation had moderated, food inflation remained high and a concern. The governor said that the CRR had been trimmed since it was felt the system would continue to be structurally short of liquidity.

This tightness could potentially hurt credit flow to productive sectors of the economy. The structural deficit in the system provided a strong case for injecting permanent primary liquidity into the system. While the equity markets sold off, the bond markets rallied with the yield on the 10-year benchmark inching lower, assuaged by the rate cut as also the comfort of additional liquidity. Governor Subbarao said the RBI would continue to infuse liquidity as and when needed. The government’s cash balances with the RBI, he noted, were unusually high and had been that way for some time. “We are discussing the spending pattern with the government to gauge what liquidity conditions will be like,” Subbarao said.

Economists believe the central bank will cut rates by around 50-75 basis points more in 2013. “Given the elevated levels of the CAD and the CPI, we maintain our view of a further modest easing of 50 basis points in 2013,” wrote Citigroup economist Rohini Malkani.

“A sticky inflation path may be ahead, with inflation hovering in the 6-7% range this year. Policy room, as a consequence, will be limited and the stance of monetary policy has to be cautious,” Deutsche Bank economists wrote.

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