overview of q2 monetary policy 2012 final

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Overview of Q2 monetary Policy 2012-13

On Oct 30, 2012, Reserve Bank of India (RBI)

announced its Q2 monetary policy. The whole

industry was waiting for RBI to announce

some measure to boost the economy. On that

RBI slashed Cash Reserve Ratio (CRR) by 25basis points from 4.50% to 4.25%.(CRR is the

share of deposits banks must keep with the

central bank). This reduction in CRR would

inject 175 billion rupees of primary liquidity

into the banking system. Industry was

expecting that RBI would also reduce interest

rates that can help industry and end consumers

with reduced borrowing cost. But contrary to

the expectation, RBI kept its key policy ratesunchanged. So repo rate at 8.00% and reverse

rate stays at 7.00%, the same level it has been

at for the past six months. Repo rate is a
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CRR

% DD/MM/YY

4.25 03/11/124.5 22/09/12

4.75 10/03/12

5.5 28/01/12

6 24/04/10

5.75 27/02/10

5.5 13/02/10

5 17/01/09

Table: 1- CRR% in last 3 years

RBI governor mentioned that interest rates are

kept unchanged because the priority for him isalso to manage inflation apart from economic

growth of the country. In the last 2 years

economic growth rate of India has slow down.

The RBI lowered its FY2013 growth estimate

to 5.8 per cent from 6.5% and raised its

inflation estimate to 7.5 per cent from 7

percent.The markets have reacted quite

negatively after the RBI's decision to keep


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the interest rate unchanged. All the interest

rate sensitive sectors have fallen sharply.

Bank Nifty was down by 2.2 percent to11222.8 (its lowest since September 21) while

1.1 per cent drops in the BSE Sensex. The

rupee was, however, marginally up and closed

a shade higher at 53.97 to the dollar after a

weak beginning. The 10-year government

bond traded at 8.18 per cent, down 5 basis

points.

The RBI said in its guidance, The reduction

in the CRR is intended to pre-empt a

prospective tightening of liquidity conditions,thereby keeping liquidity comfortable to

support growth. It anticipates the projected

inflation trajectory which indicates a rise in

inflation before easing in the last quarter.

While risks to this trajectory remain, the

baseline scenario suggests a reasonablelikelihood of further policy easing in the

fourth quarter of 2012-13. The above policy


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guidance will, however, be conditioned by the

evolving growth-inflation dynamic.

RBI Governor said We expect Decemberinflation to peak at 8.5 per cent and come

down to 7.5 per cent in March. This falling

trajectory provides the RBI with an

opportunity to implement "further policy

easing" in 4QFY13, depending on the growth-inflation dynamics. We expect the RBI to ease

repo rates by 50 bps in 4QFY13 based on our

estimates of growth-inflation and CRR by 25

bps in the remaining of FY2013 (dependant

on developments on liquidity) and balancingthe current growth and inflation situation

needed a calibrated approach which would

support growth, easing of supply constraints

but at the same time helping ease inflation.

Now, RBI would prefer to watch thegovernment's policy reforms. If reforms go

ahead as planned then inflation would come

down. This in turn may prompt RBI to cut


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down the rate and it will encourage the

economic growth of the country.

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