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RBI cuts repo rate by 25 basis points
Tue, Jan 29, 2013
Source : Team Citrus Interactive

In its third-quarter (FY13) review of monetary policy, the Reserve Bank of India (RBI) has reduced its key policy rate, the repo rate, by 25 basis points from 8 per cent to 7.75 per cent. This is the first time since the 50-basis-point cut of April 2012 that the repo rate has been cut. The cash reserve ratio has also been cut by 25 basis points from 4.25 per cent to 4 per cent. The reverse repo rate now stands at 6.75 per cent.

The central bank has cited two reasons for cutting the repo rate. One, WPI inflation has been declining in November-December due to the softening of core (non-food manufactured) inflation even though food inflation has risen. While RBI expects the staggered increase in the price of diesel to put pressure on WPI, it believes that the effect will dissipate over time. Meanwhile, the consequent reduction in fiscal deficit will bring about a sustained reduction in inflation and inflationary expectations.

However, high input costs and wages continue to put pressure on inflation. Hence, RBI has said that while the emphasis of monetary policy will shift towards mitigating the risks to growth, containing inflation and anchoring inflationary pressures will continue to be an important objective.

The second reason that the central bank has cited for cutting the repo rate is that growth decelerated below the trend rate in both FY12 and FY13. Investment activity has been below desired levels for a long time and now consumption has also begun to decelerate. External demand has been weak due to the slowdown in global growth. The widening of CAD has created implications for external sustainability. For all these reasons RBI feels that it is important to arrest the loss of growth momentum without hurting external stability. The current moderation in inflation provides RBI with the opportunity to act towards stemming growth risks.

 
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