India: Third Interest Rate Cut of the Cycle
March 19, 2013
A 25-basis point rate cut of the Reserve Bank of India’s repo rate to 7.5% and reverse repo to 6.5% announced today follows up on moves in April 2012 of 50 basis points and January 2013 of 25 basis points. Thirteen previous increases administered in 2010 and 2011 had lifted the repo rate to 8.5% from 4.0%.
Economic growth in India was the slowest in several years in 2012 at 4.5%, down from 7.9%. The three rate cuts over the past eleven months are intended to stimulate faster growth. But inflation is higher than desired despite a moderation of non-food manufactured goods prices. To wit, “headline inflation is expected to be range-bound around current levels over 2013-14 in view of sectoral demand-supply imbalances, the ongoing corrections in administered prices and their second-round effects. In addition, elevated food prices, including pressures stemming from MSP increases, and the wedge between wholesale and retail inflation have adverse implications for inflation expectations.”
Balancing these trends, the statement concludes, “even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited.” This disclaimer needn’t preclude all future rate cuts. After the previous meeting in January when rates were also reduced by 25 basis points, officials advised that the space for even more stimulus was limited by inflation. Besides cutting interest rates, another option is to reduce cash reserve requirements (CRR), which were left today at 4.0% but cut in January from 4.25%. Other CRR reductions were made last October and September.
Copyright 2012, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Reserve Bank of India
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