Analysts says CRR cut indicates RBI's concern on growth

RBI cut the cash reserve ratio by 25 bps to 4.5 percent while left the lending rate unchanged at 8 percent citing rising upside risks to inflation.

Updated: Sep 18, 2012, 00:14 AM IST

Mumbai: Analysts and economists have welcomed the RBI decision to keep the rates unchanged in view of the sticky inflation and increase the liquidity with a marginal CRR cut, saying an interest reduction is a bit too far off as the positive impact of the reform measures will take a while to materialise.

Earlier in the day, RBI cut the cash reserve ratio by 25 bps to 4.5 percent while left the lending rate unchanged at 8 percent citing rising upside risks to inflation.

Crisil Research in a note termed the RBI move as "a cautious response to the recent reforms" and said the RBI move to leave lending rates unchanged indicates that the Governor wants to see that the government stays on course on the reforms front.

"The central bank has reiterated that while policy reforms and fuel price revisions will help contain fiscal deficit and revive investor sentiments, it is imperative for the government to maintain the recent reforms momentum. If the government continues to show the resolve to reduce fiscal deficit and address supply-side bottlenecks, it will pave the way for monetary easing in the coming months," said Crisil.

Ernst&Young's Ashvin Parekh said with Monday's move RBI has clearly sent out a message that concerted fiscal policy action is required to support the monetary policy in controlling inflation.

However, he warned that though the recent reforms on FDI will lift sentiments, the growth-inflation dynamics is unlikely to change for another couple of quarters.

Terming the RBI move "as in line with the recent policy actions by the government to support growth momentum," Icra head Naresh Takkar, however, said CRR cut was an unexpected move.

"In our view, these measures, while positive, would boost growth with a lag. In terms of inflationary concerns, the increase in the price of diesel has reduced the extent of suppressed inflation even as the improvement in the monsoons has eased concerns regarding food inflation.

Thakkar said he does not see interest rates coming down soon as RBI continues to place greater importance on curtailing inflationary expectations than easing growth concerns.

StanChart India's Samiran Chakraborty said, "RBI has supported the government steps to stimulate growth as is evident in the CRR cut which will address any possible liquidity stress going forward".

But he warned that persistently high inflation and fears of headline inflation going higher reduce the space for more aggressive RBI action for the time being. However, by acknowledging the role of monetary policy in reviving growth, RBI has opened up the possibility of more easing if inflation stabilises and more fiscal action is undertaken".

Welcoming the CRR cut, the bank warned that the high inflation print and the fear of QE3 leading to further commodity inflation has deterred rate cuts by RBI. Perhaps, RBI could further foster infra investments by providing a refinance window for banks against infrastructure loans".

Deutsche Bank said the RBI move shows that it has been encouraged by reforms but constrained by high inflation. In line with our expectations, the central bank left the repo rate unchanged; in a nod to supporting liquidity and the CRR cut should be seen as seconding the government's reform agenda.