RBI cuts repo rate by 50 bps; CRR left unchanged

The Reserve Bank of India (RBI) on Tuesday lowered its main lending rate by half percentage point as it tries to boost economic growth amid some softening in inflation.

However, the reversal in the interest rate cycle is unlikely to be as rapid as anticipated earlier going forward, as concerns prevail over a whole host of macro-economic issues.

The repurchase rate (repo rate) has been reduced to 8.0% while the Cash Reserve Ratio (CRR) has been left untouched at 4.75%.

The reverse repo rate and the marginal standing facility (MSF) rate would stand reduced to 7.0% and 9.0%, respectively.

In order to provide greater liquidity cushion, the RBI has decided to raise the borrowing limit of scheduled commercial banks under the MSF from 1% to 2% of their net demand and time liabilities (NDTL).

The Bank Rate stands adjusted to 9.0% with immediate effect.

The RBI expects today's policy actions to stabilise growth around its current post-crisis trend while also containing risks of inflation and inflation expectations re-surging.

RBI Annual Policy...Dr. D Subbarao's media statement

RBI Annual Monetary Policy Statement for FY13

RBI expects India's FY13 GDP to grow by 7.3%

Assuming a normal monsoon, agricultural growth could stay close to the trend level while the industrial sector is expected to perform better than last fiscal as leading indicators of industry suggest a turnaround in IIP growth, the Reserve Bank of India (RBI) said while announcing its annual policy for FY13. The global outlook also looks slightly better than expected earlier, it said.

Overall, the outlook for domestic economic growth for FY13 looks a little better than in FY12. Accordingly, the baseline GDP growth for FY13 is projected at 7.3%. The advance estimate of the GDP growth of 6.9% for FY12 by the Central Statistics Office (CSO) is close to the Reserve Bank of India’s (RBI) baseline projection of 7%.

An important issue in this regard is the economy’s trend rate of growth, i.e., the rate that can be sustained over longer periods without engendering demand-side inflationary pressures, the RBI said.

Recent growth and inflation patterns suggest that the trend rate of growth has declined from its pre-crisis peak, the central bank noted.

Even though growth has fallen significantly in the past three quarters, projections suggest that the economy will revert close to its post-crisis trend growth in FY13, the RBI observed.

This does not leave much room for monetary policy easing without aggravating inflation risks, it said.

It must also be emphasised that the main reason for the apparent decline in the trend rate of growth relative to the pre-crisis period is the emergence of significant supply bottlenecks on a variety of fronts – infrastructure, energy, minerals and labour, the RBI said.

A strategy to increase the Indian economy’s potential by focusing on these constraints is an imperative, the central bank said.

RBI sees inflation at 6.5% by end of March'13

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