March 19, 2013 / 5:53 AM / 4 years ago

Expert Views: RBI cuts repo rate by 25 basis points

10 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 RBI cut the repo rate by 25 basis points on Tuesday, for the second time since the start of the year, in a bid to help revive flagging growth in Asia's third-largest economy, but warned that its scope for further policy easing is limited.

The Reserve Bank of India lowered its repo rate to 7.50 percent and left the cash reserve ratio for banks unchanged, in line with expectations.

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"It is another cautious rate cut, exactly as we expected. Growth remains subdued and the Reserve Bank of India is concerned about that. There has been some progress on the inflation front, especially the non-food manufacturing inflation, and on the fiscal front.

"We remain cautious on the scope for further rate cuts because of the divergence between the wholesale and retail inflation. The high current account deficit limits room for further easing, and the slowdown in growth is structural and due to supply-side issues, and should be addressed through reforms by the government. We expect another 25 basis point rate cut in 2013."

Radhika Rao, Economist, Dbs, Singapore

"Just as we expected the RBI cut the repo rate by 25 bps and left the CRR unchanged. The accompanying commentary makes it clear that further rate reduction is not a given. Evolving inflation-growth risks will be evaluated, alongside developments on the current account position. We expect the 3Q CAD to approach another record high (data due end-March), before easing marginally 4Q (Jan-March).

"We maintain our call of 50 bps more cuts this year. On liquidity, more bond buybacks and OMOs (open market operations)are likely. Passage of seasonal factors, which are aggravating the present liquidity squeeze, along with accelerated government disbursements in the new fiscal year should help ease cash conditions."

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

"In my opinion it is a very reasonable policy given the limited elbow room for RBI to ease more aggressively. But stance remains growth supportive. I do not expect immediate change in lending rates but around mid-April when liquidity situation is likely to return to normalcy, there is a possibility of transmission happening to some extent.

"The RBI had spoken of the limited scope for easing even in the January policy but have eased rates today. So I am surely expecting another baby cut of 25 bps in the May policy which will be influenced by the trajectory of core inflation which is expected to remain low. There is unlikely to be any aggressive easing, but easing will continue at a gradual pace going ahead."


"An apt 25 bps cut with much of the guidance in line with our expectation. Today's decision in conjunction with lower first half borrowing numbers coupled with timely OMO intervention would provide an appropriate interest rate regime that is expected to support growth in the face of moderate headline inflation.

"Having said that the continuous fiscal consolidation would remain the key in order to create space for further rate cuts. We reiterate our repo cut calls only towards June policy and don't expect any immediate sweetener in the April policy meet."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai

"While outlining key priorities, raising growth rates has preceded restrain on inflationary pressures. This justifies the rate cut. In guidance however, managing inflation has received greater priority, hinting at limited headroom for further rate cuts.

"In our view, the calendar year could see 25-50 bps further cut in repo rates and a 50 bps cut in CRR in FY14. Rightfully, the RBI has articulated on the role of MSPs (minimum support price) exacerbating food inflation and inflationary expectations."

Jyotinder Kaur, Economist, Hdfc Bank, New Delhi

"The focus for the market has diverted from the Reserve Bank of India's review because of the sudden political developments, which upset the pitch for both the bond and equity market.

"The RBI has delivered as per market expectation, no more no less. We think the RBI will cut rates further, not in an aggressive manner, but in a measured way. We are expecting another 50 basis points cut between now and September."


"A rate cut plus no CRR cut but promise to provide liquidity means more OMOs, which is equity negative but bond positive. On politics, given that DMK has pulled out of the government, the government will now have to depend on Samajwadi Party and Bahujan Samajwadi Party to vote in favour of them to pass any resolution. This is a negative because it will mean slower pace of reforms."

Nitesh Ranjan, Economist, Union Bank of India, Mumbai

"This is the best RBI could do. I think going into April, pass-on to credit markets is likely as liquidity condition eases. No action on liquidity front confirms that present deficit is more transitional than structural and we may see reduction in government cash balances adding to liquidity next month.

"The RBI continues to look at government for improving governance towards project implementation. Even if one-fourth of stalled projects are revived in next six months, it would be a big positive for economy. However, developing political risks may be quite detrimental at this point of time."

Saugata Bhattacharya, Chief Economist, Axis Bank, Mumbai

"This policy seems to be bit hawkish. You would tend to expect the central bank to be hawkish when one inflation reading is at around 11 percent. The governor seems to be very worried about inflation and therefore not loosening up policy in any meaningful manner."


"The rate cut was as expected, but the guidance on "quite limited" room seems to have disappointed the market. The absence of CRR and given that the government is carrying 800 billion rupees into next year, should result in some OMOs in the near term."

Anjali Verma, Economist at Phillipcapital, Mumbai

"RBI has continued to maintain limited room for monetary easing. I expect another 25-50 basis points of cuts in 2013. I expect headline inflation to decline based on expectations of a normal monsoon and falling crude prices. Even though there is a divergence between CPI and WPI, the moderation in core inflation below 4 percent has brought it within the RBI's 3-5 percent long-term average."


"I think the statement is balanced and is similar to January's stance. I wouldn't characterise it as dovish. The guidance emphasises the point that they are concerned about growth but space for more cuts is limited due to headline inflation and the divergence with CPI. We expect another 25 bps rate cut in May and then pause."

Market Reaction

* The benchmark 10-year bond yield jumped to 7.92 percent, up 4 basis points on the day, after initially easing on the rate cut. Limited scope for further rate reduction and political instability worry pushed yields higher.

* The partially convertible rupee dropped to 54.34/35 per dollar from 54.06/07 after a key government ally withdrew support, while a largely-in-line 25 basis point rate cut also disappointed.

* The benchmark 5-year swap rate rose 2 basis points to 7.16 percent while the 1-year rate gained 4 bps to 7.54 percent from levels before the RBI policy decision.

* The Sensex fell as much as 1.75 percent after the withdrawal of parliamentary support by DMK.


RBI statement, click

Reuters page, click here


- There is a case for the RBI to cut policy rates, and the central bank should take comfort from the government's efforts to cut the fiscal deficit, Finance Minister P. Chidambaram told Bloomberg TV India a day before the monetary policy meeting.

- High food inflation is a negative for India's sovereign ratings as it filters through the broader economy, with adverse consequences for growth and the country's large fiscal and current account deficits, Moody's said on Monday.

- India's recent budget should have a softening effect on inflation, central bank governor Duvvuri Subbarao said last week, sparking rate cut hopes.

- Headline inflation picked up in February on higher fuel costs but non-food manufacturing inflation, which the central bank uses to gauge demand-driven price pressures slowed to 3.8 percent in February, the weakest pace since March 2010.

- Industrial output expanded for the first time in three months in January, an early sign that Asia's third-largest economy may have turned a corner, but the recovery was sluggish underscoring the need for lowering borrowing costs.

- The slowdown in economic growth is less supportive for the sovereign credit ratings, and the government may find it challenging to meet the revenue projections in its 2013/14 budget, an analyst at Standard & Poor's said on Friday.

- The man widely expected to be India's next central bank chief favours clipping the autocratic power of the role and giving more say to a monetary policy committee. [ID:nL3N0C42GL] (Reporting by Treasury, Markets and Companies teams; Editing by Ranjit Gangadharan)

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