India Gets Easier Monetary Policy Stance

January 29, 2013

Officials at the Reserve Bank of India

  • Cut the central bank’s repo and reverse repo rates by 25 basis points each to 7.75% and 6.75%.  This was the second round of cuts.  The first was made last April and amounted to 50 basis points.  Previously, the repo rate had been raised by 200 basis points in 2010 and 225 bps in 2011, the last of which was done in October 2011.  Today’s interest rate reduction had been anticipated.
  • Cut the cash reserve requirement to 4.0% from 4.25%, a move that was not foreseen by analysts.  There were four such reductions in 2012, by 50 basis points each in January and October, 75 bps in March and 25 bps in September.

The statement released today by officials noted a recent decline in total and core (non-food) wholesale price inflation, a subdued, below-trend pace of economic growth, and the need to better manage domestic liquidity because of the persistence of tight market conditions despite the prior reduction of reserve requirements.  In summarizing, the statement asserts that

Inflation has come off from its peak, but its further downward movement is going to be slow and gradual. On the other hand, economic activity has slowed, trailing well below its potential and opening up a negative output gap. What the economy needs most of all and most urgently is new investment. This will step up currently flagging aggregate demand and also ease the supply constraints so that existing capacity is fully utilized and new capacity is built up. …The widening of the current account deficit to historically high levels, especially in the context of a large fiscal deficit and slowing growth, exposes the economy to the twin deficit risk. …The Reserve Bank, on its part, will have to calibrate monetary policy to the evolving growth-inflation dynamic and the management of the twin deficits risks.

It sounds like more monetary relief is possible, but officials are going to proceed with caution given that WPI inflation still exceeds 7%, and CPI inflation is even higher.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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