Arab Today, arab today india central bank shifts focus to growth
Last Updated : GMT 02:16:14
Arab Today, arab today
Arab Today, arab today

India central bank shifts focus to growth

Arab Today, arab today

Arab Today, arab today India central bank shifts focus to growth

Mumbai - Arabstoday

India cut cash reserve requirements for banks by 50 basis points on Tuesday to ease tight liquidity conditions, signaling a shift in policy towards reviving growth after two years of fighting inflation. With core inflation still stubbornly high, the Reserve Bank of India as expected left its policy repo rate unchanged at 8.50 percent for the second consecutive review. The central bank had raised rates 13 times between March 2010 and October 2011, making it one of the most hawkish central banks anywhere. \"The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained,\" RBI Gov. Duvvuri Subbarao said in his policy statement. Still, Subbarao said the \"current inflation trajectory\" made it premature to cut the policy rate, disappointing markets looking for definitive guidance on an interest rate cut. Bond and interest rate swap markets initially applauded the cut in the cash reserve ratio (CRR), although yields and swap rates later rose on concerns that the move meant the RBI would slow down bond buybacks through open market operations. Stocks, however, ended 1.46 percent higher on the day, powered by bank shares. \"RBI has clearly said growth concerns have come center-stage despite lingering inflationary pressures,\" said Sumedh Deorukhkar, senior economist at Spanish bank BBVA in Mumbai, who expects a 25-basis-point cut in the repo rate at the RBI\'s next review on March 15 and a combined 150 bps in cuts by the end of 2012. Expectations had grown in recent days that the RBI would cut the cash reserve ratio, the share of deposits banks must hold with the central bank. The cut on Tuesday lowered CRR to 5.50 percent and would release about Rs.320 billion ($6.4 billion) of liquidity into the banking system. INFLATION WORRY PERSISTS The RBI kept to its hawkish stance long after most central banks shifted their focus to growth, as inflation in India remained high due to elevated food prices, infrastructure bottlenecks, and an expansionary fiscal policy that pushed up rural spending power and strained government finances. Annual headline inflation, measured by the wholesale price index, slowed to a two-year low of 7.47 percent in December, thanks to a sharp decline in food inflation. However, manufactured product inflation edged up from the previous month, and the RBI said in a report on Monday that the two drivers of rate policy would be core inflation and the impact of exchange rate changes on inflation. The 16 percent drop in the rupee in 2011 has made imports even more expensive. \"Our sense is that the cut in cash reserve ratio is a reaction to the acute liquidity deficit that is persisting. As far as the inflationary situation is concerned, it has not materially changed apart from some softening in food prices,\" said Sujan Hajra, chief economist at Anand Rathi Securities. Subbarao reiterated his call for more fiscal discipline from New Delhi, which is widely expected to fall far short of its deficit-cutting target for the current fiscal year. \"In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending,\" Subbarao said in his report. C. Rangarajan, chairman of the prime minister\'s Economic Advisory Council, told TV channels that the RBI should cut interest rates only when there are definite signs that non-food inflation was easing. As expected, the RBI lowered its GDP growth forecast for the fiscal year that ends in March to 7 percent from 7.6 percent, and left its wholesale price index inflation target unchanged at 7 percent. Asia\'s third-largest economy grew 8.5 percent in the previous fiscal year. The RBI said it expected a \"modest\" recovery in growth in the fiscal year that starts in April, and said that while inflation may ease, price pressures persist. Upside risks to inflation arise from global crude oil prices, the lingering impact of rupee depreciation and slippage in the fiscal deficit,\" it said.    

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