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CRR reduced--RBI Credit policy -October 30, 2012 - a report

CRR reduced to 4.25%

NEW DELHI: The Reserve Bank of India (RBI) on Tuesday cut the cash reserve ratio (CRR)by 25 basis points to 4.25%, but kept the key policy rates including the repo rate unchanged. The CRR cut is meant to inject Rs 17500 crore into the banking system. It is intended to pre-empt prospective liquidity crunch.

The central bank has revised its inflation expectations upwards to 7.5% for FY13. The FY13 growth forecast has been cut to 5.8% from 6.5%. The bank sees a reasonable likelihood of easing in in the fourth quarter of the current financial year.

RBI Governor, D Subbarao cautioned that the policy guidance will depend on evolving growth-inflation dynamics and added that downside risks to global growth prospects have risen. The governor sees serious spillover risk of crisis in advanced economies.

Giving rational for the cut in rates, governor, D Subbarao said policy stance is "intended at managing liquidity to ensure adequate flow of credit to the productive sectors of the economy."

He also said that the policy action is intended to reinforce the positive impact of government policy actions on growth as inflation risks moderate and maintain an interest rate environment to contain inflation and anchor inflation expectations.
The reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remains at 7 per cent. The new rates will be effective November 3, D Subbarao said while unveiling the mid-year monetary policy review.
"Managing inflation and inflationary expectations remains the primary focus of the monetary policy," Subbarao said, stating that the persistently high inflation remains a "key challenge" even though growth has slid.
Taking a note of rising stress in bank's loan book, RBI has increased the provisioning for restructured loans. This would mean that banks that will have to be more vigilant in giving and monitoring loans.

The provisioning for restructured standard asset is increased from 2% to 2.75%. According to RBI data cumulative 'standard restructured' advances have almost doubled from Rs 60,379 crore as on March 2009 to Rs 1,06,859 crore as on March 2011. A loan is classified as a restructured loan when the terms of loan share changed following mutual agreement between the borrower and lenders.

Falling revenues from the services sector and a dip in exports due to global slowdown may result in higher current account deficit in the second quarter of the current fiscal, RBI said in its quarterly review of theeconomy on Monday.

The merchandise trade deficit has remained at the same level as in the first half of 2011-12, as slowdown in exports was matched by import contraction. This, coupled with the falling surplus in services trade over the medium term, is likely to leave the current account deficit - the net of imports and exports of goods and services - too wide for comfort, the RBI report says.

It said India's external sector faces some sustainability issues that emanate from large current account imbalances. Although reserves coverage and manageable external debt provide some comfort, macro-financial policies aimed at lowering inflation, containing demand by more restrained fiscal spending, improving trade competitiveness through structural and other policies and the direct use of trade policy measures would be needed for medium-term sustainability.

Finance Minister P Chidambaram on Monday rolled out a fiscal consolidation road map. The minister was frank in admitting that fiscal deficit this year would breach the budgeted 5.1% of gross domestic product to reach 5.3%, but said the aim was to bring it down to 3% by fiscal 2017. "I am making this statement, so that everybody in India acknowledges the steps we are taking and also acknowledges that the government is determined to bring about fiscal consolidation," Chidambaram told reporters. "I sincerely hope that everybody will read the statement and will take note of that."

(With inputs from Sangita Mehta, ET Bureau)

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