India's Central Bank, the Reserve Bank of India on Friday cut its repo rate – key lending rate – by 25 basis points to 7.25 percent and kept the Cash Reserve Ratio (CRR), the minimum ratio of total bank deposits to be held in cash by banking institutions in India as stipulated by the central bank, intact at 4 percent in line with expectations.
The RBI announced the policy repo rate and reverse repo rate cuts in its annual monetary policy statement for 2013-14 on Friday. The reverse repo rate (which is determined at 100 points below the repo rate) now stands at 6.25 down 25 basis points from 6.50 and the Marginal Standing Facility (MSF) rate (which is determined at 100 points above the repo rate) now stands adjusted to 8.25 percent.
RBI Governor D Subbarao speaking after the announcement said the decision to ease the monetary policy rates was taken considering the steep deceleration in the economic growth.
“Growth has decelerated continuously and steeply, more than halving from 9.2 per cent in the fourth quarter of year before last, 2010-11, to 4.5 per cent in the third quarter of last year, 2012-13,” Subbarao said.
RBI expects the growth rate to remain subdued in the first half of this year with a modest pickup in the second half of the year, subject to an anticipated improvement in the global macro economic conditions in the coming months.
The apex bank’s decision to keep the CRR unchanged was widely expected given the persistently high Consumer Price Index (CPI). Although the headline Whole Sale Price Index inflation declined sharply to 5.96 percent in March, the slowest in more than three years, the CPI remained in double digits at 10.39 percent.
“Although headline WPI inflation had eased by March 2013 and came close to the Reserve Bank’s tolerance threshold, it is important to note that food price pressures persist, and supply constraints are endemic. These could lead to generalization of inflation and strains on the balance of payments,” the Bank said in a statement.
The apex bank’s report on macroeconomic and monetary developments on Thursday also warned there is "very limited" room for further policy cuts in the current fiscal year, which started in April.
A Reuters poll last month found that 37 of 42 economists expected the RBI to cut the repo rate by 25 basis points to 7.25 percent, which would be a two-year low. The poll found that most economists expected the RBI to leave the cash reserve ratio unchanged at 4 percent, the lowest since 1974.
India's current account deficit (CAD) touched a record-high 6.7 percent of GDP in the December-ended quarter, restricting RBI's elbow room to ease the policy. However, CAD is likely to fall to about 4.4 percent in the March quarter on higher exports and easing of gold imports, according to a Reuters’ poll.
The economists also believe that the central bank in unlikely to cut the interest rates further in the coming months as the inflationary pressures persist and CAD at 5 percent of GDP is twice the level that the RBI would regard as sustainable.
“Today's policy rate cut by the Reserve Bank of India (RBI) is likely to be the last for several months. We think the RBI will pause to assess the impact of the 75bp of rate cuts seen so far this year. Thereafter, still-high inflation will limit the space for further easing,” Aninda Mitra, economist from Capital Economics said in a note shared with investors.
Following the bank’s statement, the Bombay Stock Exchange's 30-stock S&P BSE Sensex was down 0.2 percent to 19702.98 points, while the National Stock Exchange's 50-stock Nifty index fell 0.2 percent to 5988.90.
The India rupee was down 17 paise to 53.98 rupees against the dollar in early trade on Friday.