RBI cuts repo rate, indicates limited room for more

The central bank lowered its policy repo rate to 7.5% and left the cash reserve ratio for banks unchanged

The Reserve Bank of India (RBI) in its mid-quarter review of the monetary policy on Tuesday has cut the repo rate by 25 basis points to 7.50%, but at the same time it also said that “the headroom for further monetary easing remains quite limited.”

“Notwithstanding moderation in non-food manufactured products inflation, headline inflation is expected to be range-bound around current levels over 2013-14 in view of sectoral demand-supply imbalances, the ongoing corrections in administered prices and their second-round effects. In addition, elevated food prices, including pressures stemming from minimum support prices increases, and the wedge between wholesale and retail inflation have adverse implications for inflation expectations.  Risks on account of the Current Account Deficit (CAD) remain significant notwithstanding likely improvement in fourth quarter over an expected sharp deterioration in third quarter of 2012-13. Accordingly, even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited,” said RBI in its mid-quarter monetary policy review statement.

"The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this but not sufficient," the Reserve Bank said.   

Reversing its four month declining trend the Wholesale Price Index (WPI) inflation increased 6.84% in February compared with 6.62% the previous month. While the February Consumer Price Index (CPI) data accelerated to10.9% compared to January's rise of 10.79%.

The CAD to Gross Domestic Product (GDP) ratio reached a historic high of 5.4% in second quarter of 2012-13, heightening concerns about the sustainability and financing of CAD.

The GDP grew at a worse-than-expected 4.5% in the quarter ending December 31, due to slowdown in agriculture, mining and manufacturing. It grew at a lower-than-expected 5.3% in the quarter ending September 30.

At 11:20 am the yield on the 10-year benchmark government bond 8.15% 2022 was quoting at 7.91% compared with previous close of 7.88%.

On its guidance, the statement was cautious on further easing and pointed towards the rising current account deficit¿ which is widely expected to touch a record high at 5% and the expectation of inflation staying range-bound due to fuel price revisions and rising MSPs for agri produce, as the inhibiting factors.