RBI cuts repo rate by 25 bps, warns of little room for more
MUMBAI (Reuters) - The Reserve Bank of India (RBI) cut interest rates on Friday by a quarter point for the third time since January but said there is little room for further policy easing, disappointing investors and putting the onus on the government to revive a moribund economy.
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, in line with expectations.
Many in the market had been hoping for more aggressive easing and a less hawkish tone from RBI Governor Duvvuri Subbarao as India grapples with economic growth that slowed to about 5 percent in the fiscal year that ended in March, its weakest in a decade.
Instead, he warned that the risk of rising prices 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.
(Click reut.rs/1201tHj to read what experts say about the RBI's rate decision)
"The balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further monetary easing," he said in the policy statement.
Several economists said the RBI may still opt for one more rate cut in the coming months.
"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," said Radhika Rao, economist at DBS in Singapore. "Some sacrifice by way of slower growth seems inevitable then," she said.
Indian stocks, the rupee, and bond prices all fell on Friday, while other Asian markets were buoyant in the aftermath of Thursday's rate cut by the European Central Bank.
Long a hawkish global outlier as it struggled to keep inflation in check, the RBI began cutting interest rates in April 2012. But that easing has done little to spur demand in Asia's third-largest economy as bureaucratic red tape and regulatory uncertainty have deterred capital investment.
Credit growth in India slowed to a roughly three-year low at 13.9 percent as of April 5, in part because banks, faced with expensive deposit costs amid tight cash conditions, have failed to pass along most of the rate cuts to borrowers despite prodding from the central bank.
Subbarao however was hopeful that banks would lower rates during the next three to six months by amounts similar to the RBI's total rate cuts of 75 basis points so far in 2013.
Subbarao, whose five-year term ends in September, has repeatedly called on the government to take measures to ease supply constraints in the economy and encourage investment.
Inflation, repo rates, output: link.reuters.com/deq95s
For a graphic on BOP vs current account balance, see: link.reuters.com/hyj47s
Web page here
Finance Minister P. Chidambaram has sought to revive investor sentiment since taking office last year but is hamstrung by fractious coalition politics and an increasingly obstructive opposition as national elections loom within a year.
Still, he has managed to slash the fiscal deficit and push through policies to ease foreign investment in retail and airlines that are beginning to yield results, including Thursday's final government approval of Swedish retailer IKEA's $2 billion investment proposal.
"Government actions, rather than RBI rate cuts, will be more effective in improving investment," said Rajeev Malik, senior economist at CLSA in Singapore.
Subbarao held to a cautious stance despite a plunge in headline inflation as well as weak growth.
India's current account deficit swelled to a record 6.7 percent of GDP at the end of December. While it is expected to ease on lower global commodity prices and a rise in exports, it is on track to remain well above the 2.5 percent level that is seen as sustainable.
Many in the government argue that they are doing what they can to improve the investment climate and create room for a more accommodative monetary policy.
"We do not have any doubt when the next monetary policy is considered by the RBI, they would certainly see that there are adequate reasons for reconsidering the interest rates which are prevailing now and push for more growth," said Arvind Mayaram, economic affairs secretary.
Wholesale price inflation in March fell to its lowest in more than three years at 5.96 percent, but the consumer price index remained elevated at 10.39 percent.
The central bank said it expects the economy to grow at 5.7 percent in the fiscal year that started in April -- lower than many private forecasts -- and projected headline WPI inflation at around 5.5 percent during the year.
The RBI said its intention is to lower WPI inflation to 5 percent by March 2014 "using all instruments at its command."
"All the way along, Subbarao has been cautious," said Robert Prior-Wandesforde, economist at Credit Suisse in Singapore.
"However, if growth continues to disappoint, inflation is on the downside and the current account deficit improves more than expected, we will get more reductions than effectively suggested in today's statement," he said.
(Additional reporting by Swati Bhat, Neha Dasgupta, Shamik Paul and Rajesh Kumar Singh; Editing by Simon Cameron-Moore)
- Tweet this
- Share this
- Digg this
Trending On Reuters
Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) will not win enough seats to form a government in Jammu and Kashmir, two exit polls showed on Saturday, dampening its hopes of taking control of the state for the first time. Full Article