The Reserve Bank of India (RBI) on Tuesday cut the cash reserve ratio (CRR)by 25 basis points to 4.25%, but kept the key policy rates including the repo rate unchanged. The CRR cut is meant to inject Rs 17500 crore into the banking system. It is intended to pre-empt prospective liquidity crunch. 

 

The central bank has revised its inflation expectations upwards to 7.5% for FY13. The FY13 growth forecast has been cut to 5.8% from 6.5%. The bank sees a reasonable likelihood of easing in in the fourth quarter of the current financial year. 

RBI Governor, D Subbarao cautioned that the policy guidance will depend on evolving growth-inflation dynamics and added that downside risks to global growth prospects have risen. The governor sees serious spillover risk of crisis in advanced economies. 

Falling revenues from the services sector and a dip in exports due to global slowdown may result in higher current account deficit in the second quarter of the current fiscal, RBI said in its quarterly review of theeconomy on Monday. 

The merchandise trade deficit has remained at the same level as in the first half of 2011-12, as slowdown in exports was matched by import contraction. This, coupled with the falling surplus in services trade over the medium term, is likely to leave the current account deficit - the net of imports and exports of goods and services - too wide for comfort, the RBI report says. 

It said India's external sector faces some sustainability issues that emanate from large current account imbalances. Although reserves coverage and manageable external debt provide some comfort, macro-financial policies aimed at lowering inflation, containing demand by more restrained fiscal spending, improving trade competitiveness through structural and other policies and the direct use of trade policy measures would be needed for medium-term sustainability. 

Finance Minister P Chidambaram on Monday rolled out a fiscal consolidation road map. The minister was frankin admitting that fiscal deficit this year would breach the budgeted 5.1% of gross domestic product to reach 5.3%, but said the aim was to bring it down to 3% by fiscal 2017. "I am making this statement, so that everybody in India acknowledges the steps we are taking and also acknowledges that the government is determined to bring about fiscal consolidation," Chidambaram told reporters. "I sincerely hope that everybody will read the statement and will take note of that."