Fourth Central Bank Rate Cut in India

May 3, 2013

Officials at the Reserve Bank of India followed up on cuts in its repo rate of 50 basis points in April 2012, 25 bps in January 2013, and 25 bps in March 2013 with a fourth reduction today, this time again by 25 basis points to 7.25%.  The action had been anticipated but was tempered the the RBI’s released statement with warnings about an unsustainable current account deficit and persistent risks to inflation.

Growth slowed much more than anticipated, with both manufacturing and services activity hamstrung by supply bottlenecks and sluggish external demand. Most lead indicators suggest a turnaround this year, albeit at a slow pace. Inflation eased significantly in the fourth quarter of last year although upside pressures remain, both at wholesale and retail levels. 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. The challenge for the Reserve Bank is to calibrate monetary policy to address these risks and bring inflation down to the tolerance threshold in order to return the economy to a sustainable high growth trajectory in the years ahead.

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



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