India: Central Bank lowers interest rates for the second time this year
March 19, 2013
At its 19 March monetary policy meeting, the Reserve Bank of India (RBI) cut the repurchase rate by 25 basis points to 7.50%, in a decision widely expected by the market. In addition, the Bank lowered the reverse repo rate from 6.75% to 6.50%, while it left the cash reserve ratio unchanged at 4.00%. The Bank's decision follows a similar move in January, as monetary authorities attempt to rekindle economic growth.
In its accompanying statement, the Central Bank argued that, although global financial conditions have somewhat improved, global economic activity has weakened. On the domestic front, the Bank acknowledged that growth has decelerated significantly in the third quarter and that, although industrial production showed positive growth in January, capital goods production and mining activity deteriorated further.
Regarding price developments, the RBI noted that headline WPI inflation ticked up in February, reflecting higher fuel costs, while CPI inflation jumped to a record-high in the same month, pushed by higher food prices, thus widening the divergence between wholesale and consumer prices.
Monetary officials emphasized that "the key macroeconomic priorities are to raise the growth rate, restrain inflation pressure and mitigate the vulnerability of the external sector", while they acknowledged that "even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited", therefore casting doubts about the continuation of the current easing cycle.
A majority of Consensus Forecast panellists expect the RBI to ease the reins in the months ahead, resulting in a repo rate of 7.35% for June 2013. Panellists see the Bank lowering rates further next year to 7.06% by the end of fiscal year 2013/14.
Author: Ricardo Aceves, Senior Economist