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.
Keywords: RBI, CRR, RBI rate cut, monetary policy
Priority should be towards reducing the prices of the commodities which are used on a daily basis by general public, in particular, food items.
Its a brave move by Mr. Subbarao 's team but i find it little strange as
because cutting rates from loans will not affect much in the economy.
yes , it will create a start but not much extent. the day to day
commodities are so highly priced that people are afraid of buying basic
things. lets see how it works. hope for the best. My appeal to Mr.
Subbarao is that reduction of loan might affect but how much? So ,if you
sir plan for any alteration then it will be better. Thank you.
P. Chidambaram finally gets some thing out of RBI!
First, RBI monetary policy has no doubt created a sense of awareness and discussion even among the aam aadmi. Second, though argument from both the schools have their own merits and demerits pertaining to rate cut but i strongly feel there is not much space for Mr Subbarao to cut rates. He is in an unenviable position. On one hand, there is headline inflation running in double digit persistently and on the other side, there is liquidity pressure which led to initiate Open Market operations after a brief pause.
Third, in the given situation, more than RBI rate cut, whats worrying is the way how we are managing fiscal consolidation. Mr. Chidambaram has definitely kept the deficit within the target but sadly it has been achieved by trimming plan expenditure i.e. which creates capital assets in the country. To revive the economy we need Govt spending particularly on infrastructure, which in itself would help to curb headline inflation too and that should be the way to revive our economy.
RBI should have reduced the interest rates drastically to change the mood of people. The inflation is high because of high food inflation. But people dont take bank loan to buy food items. So even if interest rates are high people will go on buying food as long as they have money in their pocket. Thanks to MGNREGS people have good amount of money. But because of high interest rates people will stop buying cars and motorcycles, house, which is what is happening. Unless people think that good time is around the corner , they will not spend money. After all it is said that expectations are the driving horses of economy. A drastic reduction in interest rate will go a long way in improving the sentiments. RBI should have listened to SBI chief when he asked for at least 0.5% reduction.
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