Expert views: RBI cuts repo rate by 25 bps, holds CRR

Last Updated: Fri, May 03, 2013 06:11 hrs
Reserve Bank of India logo is pictured outside its head office in Mumbai

The Reserve Bank of India (RBI) cut its policy interest rate by 25 basis points on Friday for the third time since January, as expected, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further.

The RBI trimmed the repo rate to 7.25 percent, its lowest since May 2011, and kept the cash reserve ratio (CRR) for banks unchanged at 4 percent, also in line with expectations.

However, it warned that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy.



"Cautious RBI commentary today in addition to yesterday's macroeconomic report which highlighted 'very limited room' to ease rates has overshadowed relief from the 25 bps rate cut. As expected, the CRR was left unchanged, as policymakers seem convinced that bond buybacks and lowering of the government cash balances will be sufficient to thaw liquidity conditions and improve transmission.

"In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical rather than structural. Thereby caution should be exercised on both counts and that the central bank is unlikely to embark on an aggressive easing cycle if they are not convinced that the structural constraints have been addressed. Some sacrifice by way of slower growth seems inevitable then."


"I think the RBI is still accommodating, and when they say there is little room to cut, it suggests there is one more cut, maybe not in the next policy review but possibly in July provided inflation continues to come down.

"I think the HTM (hold-to-maturity) cut is spaced out, maybe immediately it could be a little negative, but the way it is being implemented, I think the market should be able to absorb it. But with supply pressure in May, there could be some upward pressure in yields."


- A drop in the headline inflation rate to its lowest in more than three years in March had boosted expectations the central bank would cut interest rates to help the economy recover from its slowest growth in a decade.

- The government's hefty cash holdings, now parked at the central bank, may soon be deposited at commercial banks, a move that would add liquidity to the banking system and make monetary policy more effective by making it easier for banks to cut lending rates.

- India pitched for a rating upgrade at a meeting last week with ratings agency Standard & Poor's, citing steps taken by it to control a high fiscal deficit and revive investments.

- The country's worst economic slowdown in a decade has bottomed out and growth is expected to pick up to 6.4 percent in the current fiscal year, a top economic adviser to the country's prime minister said last week.

- Exports fell 1.8 percent in the 2012/13 fiscal year, but they were up for the third straight month in March, offering some relief to the record current account deficit.

- However, a parliament deadlocked yet again over corruption scandals threatens Finance Minister P. Chidambaram's ambitious reform agenda, dealing a harsh dose of political reality on the heels of his North American roadshow to sell the India story.

More from Sify: