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RBI Cuts Repo Rate By 25 Bps; CRR Unchanged

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The RBI lowered the repo rate by 25 basis points on Tuesday, 19 March 2013, for the second time this year in a bid to help revive growth in Asia's third-largest economy, but warned that the scope for further easing is limited.
 
Appreciating the RBI's decision to cut key interest rate by 0.25 per cent , Planning Commission Deputy Chairman Montek Singh Ahluwalia said it could have given a more robust signal to the industry. "This (rate cut) is a signal and I have to say that it is in the right direction", he said, while addressing an Assocham conference.

"We are looking at it with unhappiness. We feel, the signal should have been stronger...Many people would say that the signal should have been more robust than 25 basis points", Ahluwalia said while commenting on RBI's decision to cut short-term (repo) rate by 0.25 percent to 7.5 percent to boost growth.

The rate cut was overshadowed by a political crisis as coalition partner DMK quit the UPA government, raising fresh doubts about Prime Minister Manmohan Singh's ability to push through a late burst of reforms and win back investors' confidence.
 
In its mid-quarter policy review, the Reserve Bank of India lowered its policy repo rate to 7.50 per cent as expected. The reverse repo rate is now at 6.50 per cent.
 
It also left the cash reserve ratio for banks unchanged at 4.00 per cent, in line with expectations.
 
India's economy is on track to grow at its slowest in a decade at around 5 percent in the fiscal year ending this month, and had been expected to see modest improvement in the coming year.
 
A recent uptick in headline wholesale inflation, rising food price-driven consumer inflation and a record-high current account deficit limit the RBI's space for monetary easing despite pressure from a government facing elections in 2014.
 
"Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," the RBI said in its statement.
 
That caution reinforced market expectations that the RBI, which left rates on hold for nine months before cutting them in January, will only lower them by a further 25 or 50 bps in the fiscal year starting in April.
 
After an initially muted reaction to the widely expected rate cut, the Sensex and the rupee fell on news that the Dravida Munnetra Kazhagam (DMK) would leave the ruling UPA coalition due to differences over the government's stand on alleged war crimes in Sri Lanka.
 
The withdrawal leaves Singh's coalition at the mercy of smaller parties which are sceptical of reforms such as landmark land acquisition legislation aimed at boosting investment in infrastucture.
 
Bond yields rose slightly.
 
"As the coalition becomes more fractured, and depends on outside support from parties that have a narrow agenda, the very act of policymaking gets diluted," said Abheek Barua, chief economist at HDFC Bank.

Bringing The Growth Back
“The decision of RBI to reduce repo rate by 25 basis points in its mid quarter Monetary Policy Statement, in response to the fiscal consolidation efforts made by the government, has sent a strong signal that the RBI and the government would work in tandem to bring growth back to the economy,” said Adi Godrej, President, CII. Godrej said that “at a time when industrial production is showing nascent signs of an upturn, current account deficit is slated to drop on account of improved global conditions and there are expectations of a normal monsoon, it is necessary that the RBI provides the boost to green shoots of recovery.”


Arun Singh, Senior Economist, Dun & Bradstreet India, said: "As per expectations, the RBI cut the repo rate by 25 basis points. Although this is likely to assuage the concern of the investors, effective monetary transmission is required for the credit off take to increase. Banks should lower the lending rates which seems difficult amidst tight liquidity conditions and lower deposit growth."

Commenting on RBI’s credit policy review, Gaurav Mittal, Governing Council Member, CREDAI & Managing Director, CHD Developers Ltd said: “We are extremely happy that RBI has taken cognizance of the needs of the industry and announced a 25 bps cut in the Repo Rate, bringing it to 7.5%This much awaited step will certainly boost liquidity in the market. The step is slated to be beneficial for both the buyers as well as the developers who have been struggling with cash crunch in recent times.

 
Inflation
The current account deficit hit a record-high 5.4 per cent in the September quarter and is expected to end the 2012-13 fiscal year at its highest level ever.
 
"Although capital inflows, mainly in the form of portfolio investment and debt flows provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in sentiment remains a key concern," the RBI said.
 
February's wholesale price index rose an annual 6.84 per cent, faster than in January, although non-food manufacturing inflation, which the central bank uses to assess demand-driven price pressures, slowed to 3.8 per cent, the weakest pace since March 2010.
 
The central bank said the divergence between wholesale and consumer price inflation was "exacerbating the challenge for monetary management in anchoring inflationary expectations."
 
"RBI has continued to maintain limited room for monetary easing. I expect another 25-50 basis points of cuts in 2013," Anjali Verma, economist at PhillipCapital in Mumbai.
 
In the federal budget announced at the end of February, Finance Minister P. Chidambaram said India's fiscal deficit would fall to 5.2 per cent of GDP in the current fiscal year and 4.8 per cent in the next year, targets intended to help stave off a sovereign credit rating downgrade to "junk" status.
 
(BW Online Bureau & Agencies)