RBI cuts Repo Rate by 25 basis points, CRR unchanged at four percent

The Reserve Bank of India (RBI) on Tuesday announced a cut in Repo Rate by 25 basis points to 7.25 percent from 7.5 percent in the monetary policy review. The Central bank has kept the Cash Reserve Ratio (CRR) unchanged at four percent.

RBI Governor Raghuram Rajan said that low domestic capacity utilization, mixed indicators of recovery, and subdued investment and credit growth had warranted the Central bank to announce cut in the policy rate.

He also said that the banks should pass on the sequence of rate cuts into the lending rates.

"With low domestic capacity utilization, still mixed indicators of recovery and subdued investment and credit growth, there is a case for cut in the policy rate today. However, of the risk to inflation identified in April, three still cloud the picture. First, some forecasters, notably the IMD predict a below normal Southwest monsoon, astute food management is necessary to mitigate possible inflationary effects, second, crude prices have been firming and geopolitical risks, third the volatility in the external environment could impact inflation," Rajan said.

"Therefore the conservative strategy would be to wait… with still weak investment and the need to reduce supply constraints to stay on the disinflationary path, we feel that the more appropriate stance is to front load a rate cut today and wait for data to clarify uncertainty. The banks should pass through the sequence of rate cuts into the lending rates," he added.

Rajan further said that inflation had evolved along the projected path and the timing of normalisation of US monetary policy also seemed to have been pushed back leading the way for rate cut.

He also expressed concern regarding IMD's prediction of a below-normal southwest monsoon which may pave way for a rise in food inflation. RBI has said that fuel inflation may also rise due to firming oil prices amidst considerable volatility.