Reserve Bank cuts repo rate by 25 bps, indicates limited room for more

MUMBAI Tue Mar 19, 2013 12:54pm IST

Two men make phone calls while standing near a Reserve Bank of India (RBI) crest at the RBI headquarters in Mumbai January 29, 2013. REUTERS/Vivek Prakash/Files

Two men make phone calls while standing near a Reserve Bank of India (RBI) crest at the RBI headquarters in Mumbai January 29, 2013.

Credit: Reuters/Vivek Prakash/Files

MUMBAI (Reuters) - The RBI lowered the repo rate by 25 basis points on Tuesday for the second time this year in a bid to help revive growth in Asia's third-largest economy, but warned that the scope for further easing is limited.

The rate cut was overshadowed by a political crisis in the governing coalition when a key ally quit, raising fresh doubts about Prime Minister Manmohan Singh's ability to push through a late burst of reforms and win back investors' confidence.

In its mid-quarter policy review, the Reserve Bank of India lowered its policy repo rate to 7.50 percent as expected. The reverse repo rate is now at 6.50 percent.

It also left the cash reserve ratio for banks unchanged at 4.00 percent, in line with expectations.

India's economy is on track to grow at its slowest in a decade at around 5 percent in the fiscal year ending this month, and had been expected to see modest improvement in the coming year.

A recent uptick in headline wholesale inflation, rising food price-driven consumer inflation and a record-high current account deficit limit the RBI's space for monetary easing despite pressure from a government facing elections in 2014.

"Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," the RBI said in its statement.

(Also read: Expert views, click here)

That caution reinforced market expectations that the RBI, which left rates on hold for nine months before cutting them in January, will only lower them by a further 25 or 50 bps in the fiscal year starting in April.

After an initially muted reaction to the widely expected rate cut, the Sensex and the rupee fell on news that the Dravida Munnetra Kazhagam (DMK) would leave the ruling UPA coalition due to differences over the government's stand on alleged war crimes in Sri Lanka.

The withdrawal leaves Singh's coalition at the mercy of smaller parties which are sceptical of reforms such as landmark land acquisition legislation aimed at boosting investment in infrastucture.

Bond yields rose slightly.

"As the coalition becomes more fractured, and depends on outside support from parties that have a narrow agenda, the very act of policymaking gets diluted," said Abheek Barua, chief economist at HDFC Bank.

Inflation, repo rates, output, click link.reuters.com/deq95s

For a graphic on BOP vs current account balance, click link.reuters.com/hyj47s

For fiscal deficit, click link.reuters.com/qux84t

Special coverage, click here

INFLATION

The current account deficit hit a record-high 5.4 percent in the September quarter and is expected to end the 2012/13 fiscal year at its highest level ever.

"Although capital inflows, mainly in the form of portfolio investment and debt flows provided adequate financing, the growing vulnerability of the external sector to abrupt shifts in sentiment remains a key concern," the RBI said.

February's wholesale price index rose an annual 6.84 percent, faster than in January, although non-food manufacturing inflation, which the central bank uses to assess demand-driven price pressures, slowed to 3.8 percent, the weakest pace since March 2010.

The central bank said the divergence between wholesale and consumer price inflation was "exacerbating the challenge for monetary management in anchoring inflationary expectations."

"RBI has continued to maintain limited room for monetary easing. I expect another 25-50 basis points of cuts in 2013," Anjali Verma, economist at PhillipCapital in Mumbai.

In the federal budget announced at the end of February, Finance Minister P. Chidambaram said India's fiscal deficit would fall to 5.2 percent of GDP in the current fiscal year and 4.8 percent in the next year, targets intended to help stave off a sovereign credit rating downgrade to "junk" status.

(Editing by Sanjeev Miglani)

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

REUTERS SHOWCASE

Earnings Season

Earnings Season

Reliance Q4 sales rise, refining margin narrows.  Read 

Innovative Solution

Innovative Solution

Turning smog into jewels - a Dutch designer's solution to Beijing's pollution.  Video 

Insider Trading

Insider Trading

Rajaratnam's brother loses bid to dismiss insider trading charges.  Full Article 

Literary Giant Dies

Literary Giant Dies

Mourning and memories in Gabriel Garcia Marquez's languid hometown.  Full Article 

S&P on India

S&P on India

S&P: India's ratings to depend on next govt econ, fiscal policies.  Full Article 

Ambitious Aim

Ambitious Aim

In green car race, Toyota adds muscle with fuel-cell launch.  Full Article 

Bond Market

Bond Market

A star abroad, RBI boss riles bond traders at home  Full Article 

Reuters India Mobile

Reuters India Mobile

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