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RBI eases liquidity
New Delhi, Dec 16 (Agencies):
Published on 16 Dec. 2010 11:50 PM IST
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With inflation at 11-month low level, the Reserve Bank of India on Thursday in its monetary policy review has kept unchanged the rates to strengthen the liquidity situation.
In its mid-quarter review of monetary policy, the central bank has retained the Repo Rate at 6.25 percent and the Reverse Repo Rate at 5.25 percent under the Reserve Bank’s liquidity adjustment facility (LAF). The central bank also kept the cash reserve ratio (CRR) unchanged at 6.0 percent. In additional measures to boost liquidity it has “decided to reduce the Statutory Liquidity Ratio (SLR) of scheduled commercial banks (SCBs) from 25 per cent of their NDTL to 24 per cent with effect from December 18, 2010”, the bank said in a release.
This is the first time this year that RBi has reversed its position of sucking out liquidity. The RBI this year has hiked its key rates six times. The last increase was on November 2, when the Repo Rate was hiked by 0.25 percent to 6.25 percent and the Reverse Repo by 0.25 percent to 5.25 percent to anchor inflationary expectation.
“A major challenge for RBI in the recent period has been liquidity management. It is the Reserve Bank endeavour to alleviate the liquidity pressure in a manner consistent with the monetary policy stance of containing inflation and anchoring inflationary expectations”, the central bank said.
On Inflation : On inflation front, it said that “though inflation has moderated, inflationary pressures persist both from domestic demand and higher global commodity prices. The risk to the Reserve Bank’s projection of 5.5 per cent inflation by March 2011 is on the upside.”
Incidentally, the government today reported the food inflation at 9.46 per cent as on December 4, up from 8.6 in the previous week.
Earlier, the PMEAC Chairman C Rangarajan had said that “perhaps the declining trend in inflation might tilt in favour of holding on (key policy rates)” at the existing level. RBI Governor D Subbarao in the half-yearly review of the credit policy in November spoke against raising key rates in immediate future.
“...based purely on current growth and inflation trends, the Reserve Bank believes that the likelihood of further rate actions in the immediate future is relatively low”, he had said. Although the growth momentum in the economy remains strong, the central bank said, inflation “remains significantly above the comfort level of the Reserve Bank.
“Moreover, risks to inflation remain on the upside, both from domestic demand and higher global commodity prices. There is, therefore, a need for continued vigilance on the inflation front against the build up of demand side pressures.”
The policy initiatives, it added, are aimed at bringing the liquidity deficit close to the comfort zone and stabilise interest rates in the inter-bank market. It has also hoped for 8.5 per cent for real GDP growth in 2010-11. Reacting on the credit policy, industry body Assocham termed the RBI’s decisions as “realistic and balanced”.
“(Assocham) fully endorses RBI’s view on the play of current inflationary pressures in the country as well as the existing external and domestic economic conditions,” the chamber’s President Dilip Modi said in a statement.
He further said the central bank has correctly highlighted the prevailing liquidity deficit in the system and tried to resolve the situation by adopting quantitative measures of reduction of SLR. Another chamber PHDCCI said the pause on hike in repo and reverse repo rates by the RBI is in line with the industry expectations.
The chamber’s President Ashok Kajaria hoped that the injection of liquidity in the system gets transmitted as flow of funds to the commercial sector at cost effective rates to support the projects in line and expansion plans by the industry.

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