RBI: rate cuts to also depend on current account gap

MUMBAI Wed Jan 30, 2013 5:09pm IST

Reserve Bank of India (RBI) Governor Duvvuri Subbarao smiles after arriving for a quarterly interest rate review briefing at the RBI headquarters in Mumbai January 29, 2013. REUTERS/Vivek Prakash

Reserve Bank of India (RBI) Governor Duvvuri Subbarao smiles after arriving for a quarterly interest rate review briefing at the RBI headquarters in Mumbai January 29, 2013.

Credit: Reuters/Vivek Prakash

Related Topics

MUMBAI (Reuters) - The RBI will base rate cut decisions on the current account position in addition to inflation, governor Duvvuri Subbarao said on Wednesday.

On Tuesday, the Reserve Bank of India (RBI) cut its key repo rate for the first time in nine months by 25 basis points, comforted by a drop in headline as well and core inflation, and the government's effort to curb its spending.

However, a record-high current account deficit, a widening fiscal deficit and suppressed inflationary pressures are likely to limit the room for further monetary easing.

"We will take into account what the current account deficit is. It will not be driven just by the inflation number or the inflation trajectory," Subbarao told analysts in a post-policy conference call.

A high current account gap weakens a currency. For a country like India that imports about 80 percent of its oil, it pushes up domestic fuel prices and adds to inflationary pressure.

India's current account deficit widened to a record high of 5.4 percent of gross domestic product (GDP) in the September quarter as export growth slowed more sharply than imports, with a similar gap expected in the December quarter.

Subbarao said the current account deficit in 2012/13 would be significantly higher than in 2011/12, and that would have to be factored into monetary policy.

For the fiscal year that ended in March 2012, the current account deficit was 4.2 percent of GDP.

The RBI also cut banks' cash reserve ratio, or the proportion of deposits lenders must maintain with the central bank in cash, to 4 percent from 4.25 percent on Tuesday.

(Editing by Robert Birsel)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

India-Nepal Ties

REUTERS SHOWCASE

Wipro Reaps Profit

Wipro Reaps Profit

Wipro Q1 profit up 30 pct on new contract wins   Full Article 

Monsoon Revives

Monsoon Revives

Monsoon revival keeps rain above average   Full Article 

Tackling Food Prices

Tackling Food Prices

India to free up extra 10 million tonne wheat in open market  Full Article 

Facebook Results

Facebook Results

Facebook beats Wall Street targets, stock hits record high  Full Article 

Struggling Economies

Struggling Economies

Asian economies to struggle on weak export demand - Reuters poll  Full Article 

Mining Roadblock

Mining Roadblock

Coal India's plans for 20 mines hit by land, environment delays  Full Article 

Power Jolt

Power Jolt

UAE's TAQA pulls out of India power plant deal with Jaiprakash  Full Article 

Factory Sector

Factory Sector

China July HSBC flash PMI at 18-month high of 52.0   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage