May 03, 2013 01:39 PM IST | Source:

RBI cuts repo rate by 25 bps, keeps CRR unchanged

In his fifth and last annual monetary policy RBI governor - Duvvuri Subbarao cut the policy or repo rate by 25 basis points to 7.25 percent. Consequently, reverse repo stands at 6.25 percent. However, the cash reserve ratio (CRR) remained unchanged at 4 percent.

Moneycontrol Bureau

In his fifth and last annual monetary policy RBI governor - Duvvuri Subbarao cut the policy or repo rate by 25 basis points to 7.25 percent. Repo is the rate at which banks borrow from the central bank. Consequently, reverse repo or the rate at which banks park excess liquidity with the RBI stands at 6.25 percent.

However, the cash reserve ratio (CRR) remained unchanged at 4 percent. CRR is the portion of total deposits banks are mandated to keep with the RBI.

"Against the backdrop of global and domestic macroeconomic conditions, outlook and risks, the policy stance for 2013-14 has been guided by two considerations," the governor said.

"Current assessment is that activity will remain subdued during the first half of this year with a modest pick-up, subject to appropriate conditions ensuing, in the second half of 2013-14. Although headline WPI inflation has eased by March 2013 to come close to the Reserve Bank's tolerance threshold, it is important to note that food price pressures persist and supply constraints are endemic."

Growth outlook

RBI projected a GDP growth of 5.7 percent 2013-14. It is believed to be better than the previous year but certainly not encouraging. Earlier, the CSO estimated 5 percent GDP for FY13. This was lower than the RBI's projection of 5.5 percent set out in the third quarter review of January 2013. In view of this, RBI painted a bleak outlook for business expansions in FY14.

"During 2013-14, economic activity is expected to show only a modest improvement over last year, with a pick-up likely only in the second half of the year. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps," he said.

However, the GDP forecast can be revised also based on a few key factors like normal monsoon and agricultural growth.

Inflation demon... 

Wholesale price based inflation stood at 6.0 percent, which is lower than the RBI projection of 6.8 percent. A sharp deceleration in non-food manufactured products contributed to the fall.  At the same time, the global inflation outlook in FY14 looks more benign compared to last year. Softening prices of crude, oil and food are actually driving such sentiment.

"WPI inflation is expected to be range-bound around 5.5 percent during 2013-14, with some edging down in the first half on account of past policy actions, although there could be some increase in the second half, largely reflecting base effects," the governor said in the policy statement.

RBI believes that the timing and magnitude of administered price revisions, particularly of electricity and coal, will impact the rate of inflation in 2013-14. Recently, the government allowed state miner Coal India to revise prices of coal based on grades. It was also allowed to import coal in case of domestic shortage.

Meanwhile, the rate of food inflation continues to be a threat. RBI observes that food inflation is likely to be a source of upside pressure. Thanks to persisting supply imbalances (higher demand against lower supply).

Credit growth in FY14

In 2013-14,  banks fell short of attaining 15 percent loan growth target. Lenders blamed it on gloomy economic outlook wherein companies refrain  from taking new projects. In 2013-14, RBI again projected 15 percent growth in non-food credit or the amount banks lend to individuals and companies.

"Keeping in view the resource requirements of the private sector, the growth in non-food credit of scheduled commercial bank is projected at 15.0 percent. As always, these numbers are indicative projections and not targets," Subbarao said.

Deposit growth in FY14

RBI has projected the aggregate deposits growth of all scheduled commercial banks at 14 percent, unchanged from FY13 projection.

RBI's policy rate changes at a glance


Effective Date

Reverse Repo




May 2, 2013

6.25 (-25)

7.25 (-25)


4 (unchanged)

March 19, 2013

6.50 (-25)

7.50 (-25)


4 (unchanged)

February 9, 2013




4 ( - 25)

Jan 29, 2013

6.75 (25)

7.75 (-25)



December 18, 2012




4.25 (unchaged)

Nov 3, 2012




4.25 (-25)

October 30, 2012





September 17, 2012




4.50 (-25)

August 11, 2012






April 17, 2012

7 (-50)

8 (-50)



March 10, 2012




4.75 (-75)










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