RBI cuts repo rate by 25 bps, leaves CRR unchanged

The Reserve Bank of India has cut repo rate by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect. Consequently, the reverse repo rate stands adjusted to 6.5 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect.

The RBI has left the cash reserve ratio unchanged at 4 per cent.

The central bank said high current account deficit and inflationary expectations limit possibility of further easing of rates.

At 14.02 p.m., the 30-share BSE index Sensex was trading tanked 322.17 points or 1.67 per cent to 18,971 and the 50-share NSE index Nifty fell 98 points or 1.68 per cent to 5,737.25.

The rupee fell to 54.33 against the dollar after the RBI indicated that the "headroom for further monetary easing remains quite limited".

Economic activity weakens

In its mid quarter view unveiled this morning, the RBI said that since January, while global financial conditions improved, economic activity had weakened. It noted that on the domestic front too, "growth has decelerated significantly, even as inflation remains at a level which is not conducive for sustained economic growth."

It said that food inflation remains high, driving a wedge between wholesale price and consumer price inflation, and is exacerbating the challenge for monetary management in anchoring inflationary expectations.

GDP growth

RBI said India’s GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest in the last 15 quarters. It said that what is worrisome is that the services sector growth, hitherto the mainstay of overall growth, has also decelerated to its slowest pace in a decade.

Investments, key to growth

The RBI said that the key to reinvigorating growth is accelerating investment. It said, "The Government has a critical role to play in this regard by remaining committed to fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project implementation."

It also issued a caution to the Government on upward revisions in the minimum support prices (MSP) in view of their implications for overall inflation.

Don't expect more cuts

While admitting that a competitive interest rate is necessary for reviving investment, the RBI said it was not sufficient. In its guidance, the RBI noted that risks on account of the current account deficit remain significant notwithstanding likely improvement in Q4 over an expected sharp deterioration in Q3 of 2012-13.

In a key signal, the RBI noted that even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited.

Decoded, that means don't expect more cuts for now.


Source: thehindubusinessline