Tuesday, September 18

RBI’s Monetary Policy Review - CRR Cut by 25 bps

The last few days has seen some significant policy announcements by the government the absence of which, for long, was coined as the government’s policy paralysis.

- Diesel prices have been increased by close to 12%
- Allowed 51 per cent foreign investment in multi-brand retail (remember, this was allowed last year as well, but could not be implemented due to political opposition)
- Allowed 49 per cent investment by foreign airlines in aviation
- Raised the FDI cap in broadcasting from 49 per cent to 74 per cent
- Capped subsidised LPG cylinders by a household to 6 cylinders in a year, more cylinders if required will have to be purchased at market rate that is approximately Rs 750.

While most of the above are being seen as extremely positive moves in order to avoid a credit rating cut that’s being threatened by rating agencies, these cannot be termed as big-ticket reforms. A lot more needs to be done in order to bring the economy back on the growth track. Perhaps, it is this feeling that has led to RBI only cutting Cash reserve Ratio (CRR) by 25 basis points (bps) to 4.5 per cent in its quarterly meeting on Monday.

RBI indeed prefers to see how the policy announcements (more are expected to come in the next 45 days) are implemented and how it affects the economy before considering a more comprehensive rate cuts in its October 30 meeting. Currently, the CRR cut is expected to release about Rs 17000 crore in the economy. It is also likely to bring down interest rates especially in the retail segment which includes home loans, car loans and personal loans.

Finance Minister P. Chidambaram expects the economy to clock an economic growth in the range of 6.1-6.7 per cent in the current financial year.

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