RBI cuts rates to boost Indian economy

Reuters: The RBI lowered its key policy rate as expected for the first time in nine months to support an economy set for its slowest growth in a decade, but signalled there was less room for aggressive cuts in future due to concerns over inflation.

The Reserve Bank of India cut the policy repo rate by 25 basis points to 7.75%, in line with a Reuters, poll earlier this month.

The RBI unexpectedly also reduced the Cash Reserve Ratio (CRR), the share of deposits banks must keep with the central bank by 25 bps to 4.00%, which will infuse an additional Rs. 180 billion into the banking system.

India’s headline inflation rate moderated to a three-year low of 7.18% in December, and the central bank said there was likelihood that inflation would remain range-bound around current levels heading into 2013/14 fiscal year starting April.

“This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks,” the central bank said in its quarterly monetary policy review.

Bond and stock markets were largely unmoved as dealers had already priced in a 0.25% rate cut.

The 10-year bond yield was flat at around 7.87%. The Nifty was also flat, with the bank sub-index was up 0.2%, paring initial stronger gains.

The rupee strengthened to 53.79 to the Dollar from around 53.84 before the decision.

“RBI has not abandoned its cautious stance, stressing on the ‘calibrated and limited’ nature of rate support (from) hereon,” economist, Forecast Pte in Singapore Radhika Rao said. “The scale of rate cuts is closely tied to the government’s sustained efforts to correct the twin imbalances and moderating inflation trajectory.”

The central bank however, reiterated its concerns over a bloated fiscal and Current Account Deficits (CAD) adding that its pro-growth stance will be conditioned by the management of the risks posed by them.

Since a 50 basis point cut in April, the central bank had kept interest rates on hold as inflation stayed stubbornly high, ignoring repeated calls from the government for a cut.

Having grown at near-double-digit pace before the Lehman Brothers crisis, the economy has suffered a rapid deceleration.

The RBI cut its GDP growth forecast for Asia’s third-largest economy to 5.5% for the current fiscal year, from 5.8% previously, and lowered its projection for headline inflation in March to 6.8% from 7.5% earlier.