RBI Monetary Policy Review Jan 24th 2012

Facts:

• CRR: 6% -> 5.5% (w.e.f. 28-1-2012)

• CRR cut will infuse Rs. 32,000 Cr liquidity in system

• Repo rate: 8.5% (unchanged)

• FY12 Growth projections revised from 7.6% to 7%

• Food inflation has come in control

Current policy stance is the result of contracting growth, fiscal fear and expected easing off of inflation in December.

RBI now identified that even after its anti-inflationary stance of increasing repo rates the inflation has not come in their comfort levels; it has now taken a route of adding liquidity action by cutting down the CRR from 6% to 5.5% as it saw that their prior steps curbed the growth of the country. This was expected and it will bring in good liquidity for banks and in turn in the economy. Some believe that RBI has done this with a view that Banks will be able to meet their Basel III standard’s tier I capital. So, its in favor of Banking sector.

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Food Inflation a historical perspective

 Food inflation has been a major issue for quite some time. India, post-independence, has witnessed food prices spiking in almost every decade. Food inflation was high in 1970s and early 1980s.  Due to severe drought conditions in 1987, it lasted for a year and half. The issues were addressed and inflation was minimal in 90s and early 2000s.It was thought that food inflation is a thing of past. But of late, in 2007, food prices rose drastically. This was thought to be due to increase in food prices in the global markets. But in 2008, the food prices in India did not plummet even after a drop in food prices globally. In 2009 weak monsoons played a spoil sport. Though 2010 and 2011 were good monsoon years, there was no respite. “Is food inflation going to be persistent?” is the question that flashes in one’s mind.

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