May 3, 2013 / 5:47 AM / 4 years ago

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

9 Min Read

A man makes a phone call while standing near a Reserve Bank of India (RBI) crest at the RBI headquarters in Mumbai January 29, 2013.Vivek Prakash/Files

MUMBAI (Reuters) - 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.

(Click to read the RBI's rate decision)


Rupa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai

"The RBI could have been slightly more aggressive in easing the policy given the intensity of growth slowdown and steadily declining core inflation. The divergence between RBI's and Economic Advisory Council's growth outlook is also quite wide and shows that the central bank is expecting a kind of shallow recovery during FY14.

"The indicative growth targets for M3, deposit and credit growth are consistent with the RBI's growth projection of 5.7 percent. Going forward, I don't think it will have much space to undertake aggressive easing as the uncertainties in economic environment are going to increase significantly."


"Today's action is mostly in line with the tone of yesterday's macro-economic print. Though the central bank expressed its concern over the growth moderation, the short-lived improvement in the CAD, elevated CPI and limited space for further fiscal reforms ahead of election year would restrict further easing in the policy rates.

"The tone seems hawkish and has left one with lower hopes of aggressive rate cuts in the coming meets. We expect another 25 bps by H1 FY14. Further we believe the staggered reduction in the HTM (hold-to-maturity) category would have a momentum sell off in bonds and is expected to have limited impact on the overall yield levels across the curve going ahead."


"I think there is a little bit of disappointment because of the lack of a cash reserve ratio cut. The market will take some time to fully digest this statement.

"All the way along, Subbarao has been cautious, and that is the message. Today's statement suggests there is room for another 25 basis point reduction in the repo rate.

"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. I think there could be another 50 basis points cut in the repo rate in 2013."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai

"I think it is in conjunction with the hawkish tone yesterday, in terms of the risks that are outlined by the Reserve Bank such as likely resurgence in inflation later. There is reiteration of emphasis on improved governance and addressing of supply bottlenecks, which is essentially in the government's policy domain.

"As such the scope for RBI to cut rates further is contingent to some of these steps which may be undertaken by the government. We however believe that inflation is likely to move around comfortable trajectory given the outlook on commodities and given the continued deceleration in growth momentum in the first half. Clearly, the RBI has highlighted very limited space and the inference is utmost another 25 basis points and we are unlikely to see rate cuts beyond that."

Radhika Rao, Economist, Dbs, Singapore

"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."


"The RBI's statement language disappointed markets. The central bank said growth rebound likely only from Q4 2013, inflation risks mean 'little space' for more easing, and highlighted risks from current account deficit adding that they may cause a 'swift' policy 'reversal'.

"We still see two more cuts this fiscal year and modest upside to the INR as well as G-Sec yields and the INR OIS curve."


"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 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."


"It is a very balanced policy but the HTM cut of 50 bps every quarter may be higher than market expectations. Also WPI target at 5 percent for end-March 2014 would mean that commodity prices would need to remain lower/benign to allow RBI space to cut more."


"RBI delivered on rates with a 25 bps cut; hints another 25 bps in mid-June for LAF (liquidity adjustment facility) corridor at 6.0-7.0 percent before end-June. The tone is hawkish in favour of inflation control and has not yet turned growth supportive despite setting lower FY14 estimate of 5.7 percent on GDP.

"Overall, no fire works post-policy; ensure price stability in USD/INR at 53.60/53.75-54.05/54.20 to the dollar and in Nifty .NSEI at 5,850/5,900-6,050/6,100."

Market Reaction

The 10-year bond yield rose 2 basis points to 7.79 percent from levels before the decision.

The rupee extended losses, weakening to as much as 54.06 to a dollar from 53.98 previously.

The BSE Sensex also lost further ground to be down 0.8 percent.



- 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.

Reporting by Treasury, Companies, Markets teams; Editing by Ranjit Gangadharan

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