Reserve Bank of India's review reiterates its view that price stability is the overriding objective of monetary policy and key to achieving broader economic stability.
Given retail price inflation hovering near a double-digit level and India's fiscal and current account deficits high, RBI has decided to keep the repo rate unchanged at eight per cent but cut CRR by 25 basis points to 4.25 per cent.
The cut in CRR (expected to release Rs 17,500 crore (Rs 175 billion) of primary liquidity into the banking system) should support the high demand for funds associated with the busy and festive season.
Factoring in the increasing stress on investment and growth, RBI has scaled down its GDP growth projection for 2012-13 from 6.5 per cent to 5.8 per cent, and lowered its indicative target for non-food credit growth from 17 per cent to 16 per cent.
It has also lowered the M3 growth target from 15 per cent to 14 per cent, and the deposit growth target from 16 per cent to 15
While RBI expects inflation to ease in the fourth quarter, the underlying pressures from an accommodative fiscal policy and the correction in administered prices of fuel components have prompted it to revise its inflation projection to 7.5 per cent by March 2013, compared with the earlier seven per cent.
The reactions of equity, gilt and foreign exchange markets to Tuesday's policy announcement are knee-jerk ones, and these are likely to be reversed soon.
Despite constraints, the policy has tried to support growth through more liquidity infusion, and that is the most a central bank can do at current juncture.
The Centre's continued efforts to consolidate its fiscal position and spur investment, coupled with RBI's optimistic guidance for the fourth quarter, should boost investor confidence and stabilise financial markets soon.
The writer is chairman and managing director, Bank of Baroda
