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RBI Cuts Repo Rate By 25 bps; Inflation Keeps Up

MARCH 20, 2013

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The RBI has brought down the repo rate by 25 basis points to 7.5 %, warning that there is no more room for further action.



However, the cash reserve ratio (CRR), the deposits that banks have to park with the RBI, stays the same at 4 %. While paring the repo rate (the interest rate at which the RBI provides short-term liquidity to banks) to address the growth risks, it has cautioned about the current inflationary pressures.



With only the repo rate change, the banks are unlikely to bring down deposit and lending rates. At present, banks are busy preparing their balance-sheet. Hence, they will decide on rate cuts only next month. Moreover, since a lot of bulk deposits mature in March, the banks want to retain them due to year-end considerations. Besides, credit off-take typically picks up during this time. Given the situation, there is no scope to go in for rate cuts.



The monetary policy in the current fiscal has sought to balance the growth-inflation equation by  a combination of steps for easing liquidity and reducing policy rates.  The RBI says that though growth has slowed down significantly, it is more worried about the high inflation rate. The GDP growth in the 3rd quarter at 4.5 % has been the weakest in the last 15 quarters. Industrial growth, too, has slowed, and after having been in the negative, is showing some recovery. The situation on the price front is no better. While the wholesale price inflation rose to 6.8 % (reflecting the petrol price hike) in February against 6.6 % in January, the consumer price inflation hit 10.91 % last month.


Various chambers of industry like FICCI, ASSOCHAM and CII were disappointed as India Inc. was expecting at least a 50 basis point cut in Repo Rate to ease the liquidity and interest rate scenario.





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