RBI lowers repo rate by 25 bps
Mumbai, Mar 19 : The Reserve Bank of India (RBI) reduced its repo rate by 25 basis points on Tuesday for the second time this year based on the assessment of the current macroeconomic situation and to boost growth, but said the headroom for further monetary easing remains quite limited.
The RBI said it is reducing the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect;
Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect.
Since the Reserve Bank's Third Quarter Review (TQR) of January 2013, global financial market conditions have improved, but global economic activity has weakened.
On the domestic front too, growth has decelerated significantly, even as inflation remains at a level which is not conducive for sustained economic growth.
"Although there has been notable softening of non-food manufactured products inflation, food inflation remains high, driving a wedge between wholesale price and consumer price inflation, and is exacerbating the challenge for monetary management in anchoring inflationary expectations," said the RBI.
RBI said India's GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest 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. While overall industrial production growth turned positive in January, capital goods production and mining activity continued to contract. The composite purchasing managers' index (PMI) declined in February, largely reflecting slower expansion in services. In the agriculture sector, the second advance estimates of kharif production indicate a decline in relation to the level last year. However, that may be offset, at least partly, by the rabi output for which sowing has been satisfactory," it said.
According to RBI, the year-on-year headline WPI inflation edged up to 6.8 per cent in February 2013 from 6.6 per cent in January, essentially reflecting the upward revisions effected to administered prices of petroleum products.
On the other hand, non-food manufactured products inflation, and its momentum, continued to ebb along the trajectory that began in September 2012, enabled by softening prices of metals, textiles and rubber products. Worryingly, retail inflation continued on the upward path that set in from October 2012, with the new combined (rural and urban) CPI (Base: 2010=100) inflation at a high of 10.9 per cent in February 2013 on sustained price pressures from food items, especially cereals and proteins. Consequently, the divergence between wholesale and consumer price inflation continued to widen during the year.
Monetary and Liquidity Conditions
According to RBI, Money supply (M3) and bank credit growth have broadly moved in alignment with their revised indicative trajectories. With government cash balances with the Reserve Bank persisting at a higher than normal level, the liquidity deficit, as reflected by the net drawals by banks under the liquidity adjustment facility (LAF), has remained above the indicative comfort zone.
"The reduction in the cash reserve ratio (CRR) of banks by 25 basis points, effective from February 9 and open market purchases of '200 billion since February have enabled money market rates to remain anchored to the policy repo rate," said RBI.
The Reserve Bank said it will continue to actively manage liquidity through various instruments, including open market operations (OMO), so as to ensure adequate flow of credit to productive sectors of the economy.