April 17, 2012 / 11:38 IST
The RBI cut interest rates on Tuesday for the first time in three years by an unexpectedly sharp 50 basis points to give a boost to flagging economic growth but warned that there is limited scope for further rate cuts.
The Reserve Bank of India cut its policy repo rate to 8.00%, compared with expectations for a 25 basis point cut in a Reuters poll.
COMMENTARY:Dariusz Kowalczyk, Senior Economist and Strategist, Credit Agricole CIB, Hong Kong"The reduction was bigger than expected and shows a strong shift of focus towards supporting growth, whose stabilization was described as a goal of the easing.
"The RBI said that rate cut room is limited, and we see at least 25 bps more this year."
Nirav Dalal, President And Managing Director, Debt Capital Markets, Yes Bank, Mumbai:"It is a little bit of a surprise. When you look at it objectively, 25 basis points would have been a token. I think rate cut expectation will remain very, very contained and a lot will depend on growth and inflation numbers. Based on the current and evolving environment, to expect significant rate cuts in the remaining year might not be possible.
"I would expect the 10-year yield to stabilise somewhere in 8.25-8.50 percent range in the near term."
Jonathan Cavenagh, Fx Strategist, Westpac, Singapore"RBI decision - more than expected, market was looking for 25 bps cut. INR has rallied initially (due to greater support to growth from RBI, Indian equities have gone bid) but the comment that further room to cut rates is limited may limit INR gains.
"Yesterday we had an upside surprise on inflation data and positive revisions to previous months, which will be very much at the forefront of RBI thinking in terms of determining how far they should cut rates."
MARKET REACTION:The Sensex extended gains to more than 1 percent after the rate cut.
Bond yields and overnight indexed swap rates fell after the policy review.
BACKGROUND:- The wholesale price index (WPI), India's main inflation indicator, rose an annual 6.89% in March, higher than 6.70% rise estimated by analysts. Higher food prices offset a softening manufacturing data, thereby pushing the number above consensus.
- The Reserve Bank of India cut the cash reserve ratio requirement for banks by 75 basis points to 4.75% on March 9, sooner and more sharply than expected to ease tight liquidity. Before this it had cut the CRR by 50 basis points in January.
- Production at factories, mines and utilities in February grew at a slower-than-expected pace of 4.11%, below the 6.6% estimated by analysts, weighed down by a contraction in output of consumer durable goods.
- Economic growth slowed to 6.1% in the three months to December. The government has forecast growth in the fiscal year that ended on March 31 to dip below 7% for the first time in three years.
- India's trade deficit is seen widening to USD 185 billion in 2011-12 on higher crude import bill, which may worsen the country's current account balance and further weaken the rupee.
