RBI cuts policy rates third time to spur growth

Mumbai  :  The Reserve Bank of India (RBI) Friday cut key policy rates by a quarter percent for the third time since January, a move that will help revive economic growth and make auto, housing and other loans cheaper.

The repurchase (repo) rate, the rate at which the central bank lends to commercial banks, has been cut by 0.25 percent to 7.25 percent. And the reverse repo rate is lowered by 0.25 percent to 6.25 percent.

The Reserve Bank has cut the key policy rates for the third time since January. The repo and reverse repo rates are now at their lowest level since May 2011.

The bank has kept the cash reserve ratio unchanged at 4 percent.

However, RBI Governor Duvvuri Subbarao said there was little room for further policy easing, considering the current macro economic situation.

“The balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,??? Subbarao said in the annual monetary policy for 2013-14.

He said high consumer inflation and record current account deficit were among the major risks that would constrain the central bank from further policy easing.

“The growth-inflation outlook indicated in the policy statement is also beset with risks such as the still high twin deficits, the vulnerability of our external sector to sudden stop and reversal of capital flows, inhibited investment sentiment and tightening supply constraints, particularly in the food and infrastructure sectors,??? he said.

Finance Minister P. Chidambaram said decline in inflation would give RBI scope for further rate cuts.

“RBI reduced policy rates by 25 basis points. It also announced rather liberal OMO (open market operations). If the inflation trend down further, that will decide scope for further policy action,??? Chidambaram said while reacting on the RBI move.

“Let’s accept what has been done today and let us see what the future holds,??? he said.

In the annual policy review, the RBI has projected economic growth at 5.7 percent for the current financial year, sharply lower than the finance ministry’s projection of 6.1 to 6.7 percent. The Prime Minister’s economic advisory council has pegged the growth at 6.4 percent.

“Recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation,” the RBI policy document said.

The stock market was disappointed by the RBI guidance on growth and further easing. The benchmark indices dropped by almost one percent.

The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) dropped by 0.81 percent or 160.13 points at 19,575.64 points. The wider 50-scrip S&P CNX Nifty of the National Stock Exchange (NSE) fell 0.92 percent at 5,944 points.

Bankers said the RBI move would not result in any immediate reduction in lending and borrowing rates by the commercial banks.

Talking to reporters after the RBI policy announcement, State Bank of India chairman Pratip Chaudhuri said there was little scope for rate cuts.

“There is no scope to cut rates. There is no compulsion on us to cut rates. In fact there is nothing to transmit,??? chairman of the country’s largest lender said.

ICICI Bank managing director Chanda Kochhar said: “The present downward movement in deposit rates will not be sustained. And a lending rate cut will depend only on the movement of cost of funds.???