Mar 19, 2013, 05.56 PM IST | Source: Moneycontrol.com

Reserve Bank of India cuts repo by 25 bps, CRR unchanged

In its mid quarter (Jan-March) monetary policy review the Reserve Bank of India (RBI) on Tuesday cut the repo rate by 25 basis points to 7.50%. Consequently, the reverse repo came down to 6.50%. The policy action was in expected lines.

Moneycontrol Bureau 

In its mid quarter (Jan-March) monetary policy review the Reserve Bank of India (RBI) on Tuesday cut the repo rate by 25 basis points to 7.50%. Consequently, the reverse repo came down to 6.50%. The policy action was in expected lines.

Repo is the rate at which banks borrow short-term money from the central bank. Banks park excess money with RBI through reverse repo window.

"The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this, but not sufficient. Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," RBI said in the policy release.

Also read:    RBI repo cut: Will banks reduce interest rates?

Limited scope for further rate cuts

Even though RBI slashed the policy rate by 100 bps in the last one year, the chances for further rate cut remains bleak due to the spectre of inflation. India is perhpas going through a stagflation like situation wherein the growth stagnates but inflation remains at elevated level.

RBI expects the wholesale price inflation to be range-bound around current levels over 2013-14 in view of sectoral demand-supply imbalances, the ongoing corrections in admistered prices.

"Risks on account of the current account deficit (CAD) remain significant notwithstanding likely improvment in Jan-March quarter over an expected sharp deterioration in Q3 of 2012-13. Accordingly, even as the policy emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," RBI said.

Both the equity and bond markets did not react due to the policy action. However, those reacted sharply on account of a major political development. DMKwithdrew all sort of support from the ruling UPA government.

The inflation demon

Food inflation continues to haunt RBI while the central bank observed some bit of softening in non-food manufacturing products inflation. A wedge between wholesale price and consumer price inflation is posing a challenge for RBI in anchoring inflationary expectations.

"Worryingly, retail inflation continued on the upward path that set in from October 2012, with the new combined (rural and urban) CPI inflation at a high of 10.9 per cent in February 2013 on sustained price pressures from food items, especially cereals and proteins," RBI said.

Credit rating agency Moody's Investors Service on Monday said rising food inflation is a negative for India's sovereign rating and may hurt government finances and monetary policy flexibility. The wholesale price inflation for food stood at 11.4% in February.

CRR remains unchanged....

Cash reserve ratio or the portion of banks are mandated to keep with RBI remains unchanged at 4%. A section of market participants expected a reduction of this component on account of liquidity tightness. It was perceived that banks would not be able to cut their  rates without any CRR cut that is supposed to give them some liquidity.

On an average, banks have been borrowing more than Rs 1 lakh crore daily from RBI Liquidity Adjustment Facility (LAF), which is much above its comfort zone at around Rs 60,000 crore.

Moreover, deposits are growing at a sluggish rate of 12.7% year-on-year till first week of March, 2013 as against 16.3% y-o-y credit growth. This leaves little room for bankers to cut their deposit rates. Unless and until, banks slash their deposit rates, they really cannot cut their lending rates as it will erode the net interest margin - the key parameter for any bank's financial performance.

"The Reserve Bank will continue to actively manage liquidity through various instruments, including open market operations (OMOs), so as to ensure adequate flow of credit productive sectors of the economy," RBI said.

Policy action since Jan, 2012

Date

Reverse Repo

Repo

 SLR

CRR

March 19, 2013

6.50 (-25)

7.50 (-25)

23

4 (unchanged)

Jan 29, 2013

6.75 (-25)

7.75 (-25)

23

4 (25)

December 18, 2012

7

8

23

4.25 (unchaged)

October 30, 2012

7

8

23

4.25 (-25)

September 17, 2012

7

8

 23

4.50 (-25)

July 31, 2012

7

8

  23

(-100)

4.75

April 17, 2012

7 (-50)

8 (-50)

24

4.75

March 15, 2012

7.50

8.50

 24

4.75 (-75)

January 24, 2012

7.50

8.50

 

 24

   5.50 (-50)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Growth

RBI's baseline growth projection for GDP growth remains at 5.5 per cent set out in the third quarter monetary policy review. This is higher than the estimate by the Central Statistics Office (CSO). India's GDP growth stood at 4.50% in Q3, 2012-13, slowest in the last 15 quarters.

"What is worrisome is that the services sector growth, hitherto the mainstay overall growth, has also decelerated to its slowest pace in a decade," RBI said praising the government's committment for fiscal austerity measures.

saikat.das@network18online.com

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