The Reserve Bank of India (RBI), on Tuesday, reduced the indicative policy rate (repo rate) by 25 basis points from 7.75 to 7.50 per cent. Repo rate is the rate at which banks borrow short-term funds from the central bank.

“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 RBI said in its mid-quarter review of monetary policy.

Sufficiency conditions, according to the central bank, include bridging supply constraints, staying the course on fiscal consolidation, both in terms of quantity and quality, and improving governance.

India’s GDP growth in the third quarter of the current financial year, at 4.5 per cent, was the weakest it has been in the last 15 quarters.

“What is worrisome is that the services sector growth, hitherto the mainstay of overall growth, has also decelerated to its slowest pace in a decade,” the RBI said.

The RBI also said that inflationary pressures and the widening current account deficit (CAD) remained a threat to the economy.

“Even as the policy stance emphasises addressing growth risks, the headroom for further monetary easing remains quite limited,” it said.

“Elevated food prices……. have adverse implications for inflation expectations. Risks on account of the CAD remain significant notwithstanding likely improvement in the fourth quarter over an expected sharp deterioration in the third quarter of 2012-13,”the RBI added. This time, the RBI did not cut the cash reserve ratio (CRR), the portion of the deposits that banks are required to keep with the RBI, which remains at 4 per cent. The RBI will, however, continue to actively manage liquidity through various instruments, including open market operations (OMO), so as to ensure adequate flow of credit to the productive sectors of the economy.

Guidance

Notwithstanding moderation in non-food manufactured products inflation, the apex bank expected the headline inflation to be range-bound around current levels over 2013-14.

The RBI felt so 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 MSP increases, and the wedge between wholesale and retail inflation have adverse implications for inflation expectations,’’ it added.

Minimum support price

From an inflation perspective, upward revisions in minimum support prices should warrant caution in view of their implications for overall inflation.

The Government, it said, had a critical role to play by remaining committed to fiscal consolidation, easing the supply bottlenecks, and improving governance surrounding project implementation.

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