Fintotal News Analysis | RBI Keeps Repo Rate Unchanged in Second Quarter Review
RBI Keeps Repo Rate Unchanged in Second Quarter Review
Ruby Jacob, 30 Oct 2012

In its Second Quarter Monetary Policy Review today RBI lowered CRR by 25 basis points and refrained from touching Repo rate, dashing expectations of quite a few. Accordingly CRR stands at 4.05% brought down from 4.5%. Repo rate and reverse repo rate are same at 8% and 7% respectively.

Cash Reserve Ratio (CRR) is the portion of a bank's funds it must keep with RBI daily in cash. Today's CRR cut is expected to release Rs 1.75 crores into the banking system which will be made available to markets. New CRR rate will be effective from 3 November. However this has not cheered markets which are facing a much bigger deficit. Sensex tanked about 200 points after the review before recovering.

The central bank has made clear that its primary objective is to manage inflation. Inflation rate in the economy is much higher than RBI's comfort zone. It averaged 7.5% for 2012-13 until August. RBI's projection for headline inflation for 2012-13 has been raised to 7.5% from 7% and baseline GDP projection for 2012-13 has been lowered to 5.8% from the earlier 6.5%.

RBI's tough stance on monetary policy since April has had negative effect on growth in the economy. However inflation and growth must go in tandem. Today's monetary policy has raised hopes for a rate cut in the fourth quarter. As recent policy initiatives of the government bring results in terms of increased activity, it would make way for RBI to lower repo rate.

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