RBI Monetary Policy Review

Tuesday | October 30, 2012

Content

RBI monetary policy Impact

D. Vijiya Rao - Research Analyst Vijiya.d@angelbroking.com (022) 2921 2000 Extn. 6134 This months rally in gold prices above the $1900/oz mark is indicative of structural problems and difficulties at the the Jackson Hole Symposium. On the back of these positive expectations, markets are witnessing a bit of stability, and further trend in the global financial markets would be based on the outcome of the decisions taken by the policymakers and central bankers at this symposium. Angel Commodities Broking Pvt. Ltd. Registered Office: G-1, Ackruti Trade Centre, Rd. No. 7, MIDC, Andheri (E), Mumbai - 400 093. Corporate Office: 6th Floor, Ackruti Star, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 2921 2000 MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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RBI Monetary Policy Review

Tuesday | October 30, 2012

Reserve Bank of India credit policy review October 2012 Key points: CRR cut by 25 basis points to 4.25 percent Key interest rates kept unchanged at 8 percent Inflation still remains a primary focus

The Reserve bank of India (RBI), in its second quarter monetary policy review has cut the Cash Reserve Ratio (CRR) that is a portion of the deposits that the commercial banks are required to keep with Reserve Bank of India, by 25 basis points to 4.25 percent from the earlier level of 4.50 percent. This rate cut by the central bank would free up Rs. 17,500 crores of liquidity. The central bank has kept the key interest rates unchanged at 8 percent. A reduction in CRR would lead to more liquidity in the banking system and thus prompting banks to cut interest rates. RBI has raised concerns on the persistent high inflation and decelerating growth of the third largest Asian economy. It has revised downwards the GDP growth of the country to 5.8 percent for this fiscal (March 2013) from the earlier projection of 6.5 percent and also raised its headline inflation projection for March 2013 to 7.5 percent from 7 percent earlier. Indias wholesale price inflation increased to 7.81 percent in September 2012 from 7.55 percent in August. The GDP grew at a modest pace of 5.5 percent in the quarter ended June 2012. In its last mid quarter policy review the central bank has cut the CRR by 25 basis points. RBI in its pursuit to fight inflation has raised its key rates 13 times since March 2010 and reversed its policy stance in the April 2012, when it cut the repo rate by 50 basis points. Earlier during the month of September 2012, the government has unveiled a slew of reforms which included the raising of the foreign investment limit in key sectors such as multi-brand retail and aviation, sectors. In order to rein in the deficit the government raised diesel prices and reduced the subsidy on the cooking gas this year.
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RBI Monetary Policy Review

Tuesday | October 30, 2012

Inflation (%)

GDP growth (%)

Source: Reuters

Impact

After the RBIs announcement, BSE Sensex and NSE declined and rupee also fell tracking the indices. The currency weakened 0.1 percent to 54.08 as of 3:00 p.m. It had rallied to a high of 51.35 on October 5, 2012 on the back of governments economic reforms announcement. A cut in the CRR would pave way for the banks to lend more to the productive sector but a reduction in the interest rates was more imperative to revive investment growth which was widely expected by the market participants in todays monetary review. The country currently faces high inflation, slow economic growth along with twin deficits-fiscal and current account deficit which calls for more policy initiatives by the government in order to stimulate growth.

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