RBI credit policy: Repo rates unchanged, CRR cut 0.5%

The Reserve Bank of India left key interest rates untouched on Tuesday but cut cash reserve ratio or CRR by 0.5 per cent to 5.5 per cent.

The repo rate (the rate at which the RBI lends funds to banks) stays at 8.5 per cent and reverse repo rate (at which the RBI borrows money from banks) remains unchanged at 7.5 per cent.

The cash reserve ratio (CRR) was cut 0.5 per cent at 5.5 per cent. This is the percentage of deposits banks have to maintain with RBI. (RBI may spring a surprise here though)

The central bank announced the third quarter (quarter to December 2011) review of the monetary policy on Tuesday.

Here are some key drivers for the RBI policy stance:

* RBI addresses growth concerns by cutting CRR rate. The Indian growth outlook has weakened as a result of adverse global and domestic factors. Monetary actions needed to strike a balance between risks to growth and inflation.

* Liquidity conditions remained tight which made lending tough to fuel growth.

*  Inflation remains a key challenge. Although primary food inflation declined sharply reflecting seasonal fall in ve*getable prices and high base, high protein inflation continues due to structural demand-supply imbalances. The decline in food inflation is expected to be short-lived as a result.

* Inflation in non-food manufactured products remains persistently high, reflecting input cost pressures, partly resulting from the rupee depreciation that has offset the impact of softer global prices of some commodities.

* Upside risks to inflation persist from insufficient supply responses, exchange rate pass-through, suppressed inflation and an expansionary fiscal stance.

 * The government is living beyond its means as it makes higher-than-expected revenue spending. The government is spending more on fuel, food and fertilizer subsidy bill and the high borrowing is worrying RBI. A sharp surge in the fiscal deficit means RBI has to lend more to the government by printing more money. This adds to inflation.

RBI hiked rates 13 times since March, 2010 in a bid to fight inflation.  India’s headline inflation, measured by the wholesale price index, for the month of  December 2011,  eased to 7.47 per cent, the lowest in two years against 9.11 per cent in November 2011 against 9.73 per cent in October.

The stock market reacted positively with the BSE sensex and NSE Nifty trading jumping sharply by nearly one per cent. The Indian rupee was trading at 50 to the USD after opening strong.