RBI cuts repo (interest rates) by 0.25%; CRR unchanged

Business

oi-Sunil

By Sunil Fernandes

Updated: Friday, May 3, 2013, 11:43 [IST]

Continuing from where it left last time, the RBI once again dropped repo rates by 0.25 per cent, while leaving the cash reserve ratio unchanged. Repo rate is the rate at which te RBI lends money to banks. Today's action was largely prompted by lower inflation and would help prop growth in the economy.

Today's action comes on the back of statements from the RBI warning of little space for monetary easing.

"Looking ahead, the effectiveness of monetary policy in bringing down inflation pressures and anchoring inflation expectations could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Food price pressures, upward revisions in the MSPs and rapid wage increases are leading to a wage-price spiral. Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge," the RBI said in its statement.

On GDP growth the RBI statement said, "For GDP growth during 2012-13, the CSO's advance estimate of 5.0 per cent is lower than the Reserve Bank's baseline projection of 5.5 per cent set out in the Third Quarter Review (TQR) of January 2013, reflecting slower than expected growth in both industry and services."

According to the RBI near-term risks to global financial stability are retreating as the probability associated with tail events has reduced, rekindling risk appetite as reflected in sharp rallies in financial markets. "In AEs, funding conditions have improved, but credit conditions remain stressed on concerns about debt overhangs and the persisting fragility of balance sheets. For EDEs, potential spillovers from unconventional policies in AEs remain significant, especially mispricing of credit risk, a rise in liquidity risk, and excessive capital flows entailing increased debt and foreign exchange exposure in response to low borrowing costs. In addition to safeguarding domestic financial stability, these economies also face the challenge of creating conducive financing conditions for accelerating growth with stability," the central bank stated.

Stock markets were not too enthused by the rate cut, which was on expected lines. The BSE Sensex was down 138 points in trade.

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