Reserve Bank of India Cuts Interest Rate by 25bps to 7.25%

Based on an assessment of the current and prospective macroeconomic situation, the RBI has decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 percent.

Excerpt from the statement by the Reserve Bank of India:

The decision to further ease the monetary policy stance was informed by two considerations: First, growth has decelerated continuously and steeply, more than halving from 9.2 per cent in the fourth quarter of year before last, 2010-11, to 4.5 percent in the third quarter of last year, 2012-13. The Reserve Bank’s current assessment is that activity will remain subdued during the first half of this year with a modest pick-up in the second half, subject to appropriate conditions ensuing.
The second consideration that went into the policy decision was the inflation outlook. Although headline WPI inflation had eased by March 2013 and came close to the Reserve Bank’s tolerance threshold, it is important to note that food price pressures persist, and supply constraints are endemic. These could lead to generalisation of inflation and strains on the balance of payments.
The decision to further cut the repo rate carries forward the measures put in place since January last year towards supporting growth in the face of gradual moderation of headline inflation. Nevertheless, it is important to note that recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation.
In the Reserve Bank’s assessment, WPI inflation is expected to be range-bound around 5.5 percent during 2013-14. This assessment factors in the domestic demand-supply balance, the outlook for global commodity prices and the forecast of a normal monsoon. It is critical to consolidate and build on the recent gains in containing inflation. Accordingly, the Reserve Bank will endeavour to condition the evolution of inflation to a level of 5.0 percent by March 2014.

RBI | Nuno Fontes |
5/3/2013 8:48:55 AM