The Reserve Bank of India (RBI) would roll out easy monetary policies if the rate of inflation coupled with the current account deficit softens below its expected level in the coming quarters, said D Subbarao, the central bank governor.
"There will be more room for monetary policy actions if inflation eases further and the current account deficit moderates further. If it (both inflation and CAD) goes as usual, the scope is limited for rate cuts," the governor told reporters here in Mumbai.
The baseline WPI inflation projection for March 2013 is revised downwards from 7.5% set out in the second quarter review to 6.8%. However, the rate of food inflation continues to be persisting. RBI has also revised the GDP growth to forecast to 5.5% in 2012-13 as against 5.7% estimated earlier. The central bank expects CAD may cross the level of 5.4% of GDP recorded in July-September quarter, 2012-13.
The central bank on Tuesday cut its repo rate, at which banks borrow funds from, by 25 basis points to 7.75% while the cash reserve ratio or the portion of deposits banks are mandated to park with RBI, is reduced by similar 25 bps to 4%.
In its discussion with bank CEOs on the policy day, RBI got assurance of cutting lending rates. However, banks' net interest margin will contract due to this. They also expressed their inability to reduce deposit rates.
According to Subbarao, the CRR cut was actually aimed at giving more liquidity to banks. This will enable banks to slash interest rates.
In a bid to create alternatives for gold investment, RBI has also discussed the issue of introducing inflation indexed bonds. Earlier too, RBI had introduced the same.
"We want to re-design the same. We consulted banks on whether it might be successful and which inflation (WPI or CPI) to be taken. The participation of retail investors too figured in the discussion. When the rate of inflation is falling, the government benefits from it. However, retail investors gain when inflation is rising," he said adding that it is aimed at winning people from gold investments and both the government and banks have to be involved to make it happen.
Refuting a popular market perception that accessing liquidity through marginal standard facility may irk the regulator Subbarao said, "We conveyed banks that accessing MSF is not a stigma. Banks can very much access it when they are constrained with liquidity." Currently MSF stands at 8.75%.
Among other factors, growth moderation was the key trigger for RBI to go for repo and CRR cuts.
saikat.das@network18online.com
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