First Indian Interest Rate Cut Since April 2009

April 17, 2012

The Reserve Bank of India cut its repo rate and reverse repo rate each by 50 basis points to 8.0% and 7.0%.  Those reductions were twice as big as forecast and marked the first cuts since a 25-bp move in April 2009 culminated 425 basis points of easing begun in October 2008.  In between then and now, the RBI had implemented 13 rate increases from March 2010 to October 2011.  The tightening campaign of 2010-11 was paused this past December, and a new bias was introduced this year with cash reserve ratio cuts of 50 basis points in January and 75 bps in March.  Reserve requirements were not changed today and remain at 4.75%.

Today’s rate cut was taken against the backdrop of sub-7% WPI inflation and 7.0%+ projected 2012-13 growth and meant to

  • Adjust policy rates to levels consistent with the current growth moderation. “Growth  decelerated significantly to 6.1 per cent in Q3 of 2011-12, though it is expected to have recovered moderately in Q4. Based on the current assessment, the economy is clearly operating below its post-crisis trend.”
  • Guard against risks of demand-led inflationary pressures re-emerging.
  • Provide a greater liquidity cushion to the financial system.

Although the repo and reserve repo rates were reduced more than analysts were anticipating, a statement on the central bank web site warns against viewing today’s action as the start of a series of easings.

The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasized that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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