RBI cuts repo rate by 25 bps, says room for further easing limited

RBI cuts repo to 7.5%, drawing comfort from wholesale price inflation staying under 7%; keeps CRR unchanged

A file photo of the RBI building in Mumbai. Photo: Abhijit Bhatlekar/Mint

Mumbai: The Reserve Bank of India (RBI) on Tuesday cut its key lending rate by 25 basis points (bps) in an attempt to prop up growth in the slowing economy, drawing comfort from inflation based on the wholesale price index staying under 7%, but warned that room for further monetary easing was limited.

The apex bank kept the cash reserve ratio (CRR) unchanged in its mid-quarter monetary policy.

The rupee weakened and the BSE’s benchmark Sensex fell on RBI’s warning.

Noting that risks on account of the current account deficit (CAD) remain significant, despite a likely improvement in the fourth quarter, RBI said, “Accordingly, even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited.”

The Sensex fell by 0.5% to 19,219.68 points, while the National Stock Exchange’s Nifty dropped by 0.41% to 5,811.25 points. The rupee fell to 54.10 after the policy announcement from 53.99 before. The yield on the 10-year bond fell to 7.867% from 7.878%. Bond prices and yields move in opposite directions.

RBI lowered the repo rate, at which it lends short-term funds to banks, to 7.5% from 7.75%. CRR, the portion of deposits banks need to park with RBI on a fortnightly basis, is currently at 4%.

The repo rate cut had been widely expected—22 out of 24 market participants polled on Monday predicted a 25 bps reduction.

The central bank last cut rates in January, when it reduced the repo rate and CRR by 25 basis points each. One basis point is 0.01 percentage point.

“A repo rate cut doesn’t mean much for the banking system, as it will not bring down our cost. Any significant cut in lending rates is unlikely,” said Pratip Chaudhuri, chairman of State Bank of India.

RBI has been cautious in lowering rates as it fights inflation in Asia’s third largest economy. Inflation based on wholesale prices has fallen below 7% in recent months after staying above that level throughout the past year. After easing to 6.62% in January, inflation inched up to 6.84% in February.

But core inflation, or non-food, non-oil manufacturing inflation eased significantly to 3.79% in February from 4.12% in January, giving room for RBI to cut rates, economists said.

The rate cut is aimed at boosting the sagging economy, which is expected to grow at 5% in the current fiscal, the slowest pace in a decade. Economic growth slowed to 4.5% in the December quarter from 5.3% in the preceding quarter.

“Notwithstanding moderation in non-food manufactured products inflation, headline inflation is expected to be range-bound around current levels over 2013-14 in view of sectoral demand-supply imbalances, the ongoing corrections in administered prices and their second-round effects,” RBI said.

CAD reached a record 5.4% of gross domestic product in the quarter ended September on account of rising imports and declining exports. Finance minister P. Chidambaram has called the widening deficit one of the biggest risks facing the Indian economy.

“From an inflation perspective, upward revisions in the minimum support prices should warrant caution in view of their implications for overall inflation,” RBI said.

 

PRIYA

PGDM 2nd SEM