MUMBAI, Jan 29 (Reuters) - India's central bank lowered its
key policy rate for the first time in nine months on Tuesday,
but struck a cautious note on further easing as it waits to see
how the government's upcoming budget aims to bring a bloated
fiscal deficit under control.
The Reserve Bank of India cut the policy repo rate
by 25 basis points (bps) to 7.75 percent to help
support an economy set to post its slowest annual growth rate in
The RBI revised its GDP growth forecast for Asia's
third-largest economy to 5.5 percent from 5.8 percent for the
fiscal year ending in March, a sharp come down for an economy
that was running at near double-digit growth before the Lehman
Though respectable by other standards, the growth rate is
too slow for an economy trying to support hundreds of millions
of poor people, and is a worry for the ruling Congress party as
it heads towards an election next year.
"It is now critical to arrest the loss of growth momentum
without endangering external stability," the RBI said in its
But it went on to list constraints, notably worryingly high
current account and fiscal deficits, and the risk that inflation
could flare again.
Governor Duvvuri Subbarao told a news conference that if
inflation and the current account deficit moderated by more than
expected there would be room to ease monetary policy.
"The message that we are trying to give is that as much as
there is some space, it going to be quite limited, and we are
going to use it with a lot of judgment on timing and quantum,"
EYES ON BUDGET
Analysts were split on their outlook for rates, with some
unprepared to forecast beyond another quarter percentage point
cut, whereas Credit Suisse, in a note to clients, stood by its
forecast that the repo rate will come down another 100 basis
points, though perhaps not by July, as it had expected earlier.
Eyes will now fall on Finance Minister P. Chidambaram's
annual budget statement due in late February, to see how the
government plans to put its finances in order.
Speaking to Reuters Television in London, Chidambaram
acknowledged that the "ball was in the government's court" to
revive growth. He pledged to present a "responsible" budget.
"I welcome the decision (the RBI governor) has taken today.
Going forward, if inflation moderates, I think he will do more,"
He added: "More has to be done on the fiscal side (to)
contain inflation and revive growth."
Some analysts predicted the RBI would respond to the budget
by cutting another quarter percentage point in March.
"The fiscal side will be critical," Jonathan Cavenagh, a
strategist at Westpac Banking Corporation in Singapore,
commented. "If the RBI feels the government's reform push is
slipping, rate cuts will be put on the back burner."
The size of the latest cut was in line with forecasts in a
Reuters poll of analysts this month. The central bank gave
guidance in October that it could reduce rates during the
January-March quarter, and Indian bond and stock markets were
largely unmoved as dealers had already priced in the move.
But the RBI unexpectedly also reduced the cash reserve ratio
(CRR), the share of deposits that banks must keep
with the central bank, by 25 bps to 4.00 percent, which will
infuse an extra 180 billion rupees ($3.4 billion) into the
INFLATION SEEN SETTLING
India's headline inflation rate moderated to a three-year
low of 7.18 percent in December, and the central bank said there
was likelihood that inflation would remain range-bound around
current levels entering the 2013/14 fiscal year starting April.
The RBI lowered its projection for headline inflation in
March to 6.8 percent from 7.5 percent earlier.
"This provides space, albeit limited, for monetary policy to
give greater emphasis to growth risks," the central bank said.
Montek Singh Ahluwalia, deputy chairman of India's Planning
Commission, regarded the RBI's easing as an endorsement of steps
taken by the government to tackle its deficit.
"I think what it signals is the RBI feels that the
government has taken a number of steps which gives the fiscal
space needed for monetary policy to support growth," Ahluwalia
said, adding that the economy was beginning bottom out.
Last September, Prime Minister Manmohan Singh's fractious
coalition ended a debilitating phase of policy inaction to make
urgently needed reforms to reduce the fiscal deficit and attract
foreign investment to help the current account deficit and
The measures, which included giving foreign players more
access to its retail and aviation sectors, helped India
forestall the threat of a sovereign debt credit rating downgrade
to junk status.
Recently, as part of an ongoing drive to trim spending, the
government gave oil companies more room to set regulated diesel
While steps taken by the government to bring the 2012/13
fiscal deficit within a targeted 5.3 percent of GDP have reduced
near term risks, cuts in politically sensitive subsidies were
needed for sustainable fiscal consolidation, the RBI said in an
economic report issued a day before the policy review.
The current account deficit (CAD) touched a record high of
5.4 percent in July-September and is likely to rise further in
the December quarter, according to the central bank's economic
"Financing the CAD with increasingly risky and volatile
flows increases the economy's vulnerability to sudden shifts in
risk appetite and liquidity preference, potentially threatening
macroeconomic and exchange rate stability," the RBI said.
For now though, India markets appeared content with the
RBI's measured easing. Benchmark government 10-year yields
ended at 7.85 percent, down 1 bp from Monday.
While the National Stock Exchange index, having struck a
two-year high on Jan.6, fell to its lowest close in a week,
ending 0.4 percent down, as did the bank sub-index.
The Indian rupee strengthened to 53.76/77 per
dollar from its Monday close of 53.91/92.