India: Central Bank cuts interest rates for the third time this year
May 3, 2013
At its 3 May monetary policy meeting, the Reserve Bank of India (RBI) lowered the repurchase rate by 25 basis points to 7.25%, a decision that was broadly expected by market analysts. Similarly, the Bank cut the reverse repo rate from 6.50% to 6.25%, while authorities decided to leave the cash reserve ratio unchanged at 4.00%.
In its accompanying statement, monetary authorities pointed out that economic growth decelerated significantly in the third quarter of the fiscal year 2012/13, due to protracted weakness in the industrial sector as well as on the back of domestic bottlenecks. In addition, the Bank anticipates that economic activity will remain subdued in the first half of the current fiscal year, while anticipating that it will pick up slightly in the second half. Regarding price developments, the RBI noted that although headline WPI inflation eased in March, elevated food prices persist.
Monetary officials surprised market analysts by their hawkish tone, emphasizing that "the balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further monetary easing", while adding that "it is important to note that recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation."
A majority of Consensus Forecast panellists expect the RBI to ease the reins in the months ahead, resulting in a repo rate of 7.21% for June 2013. Panellists see the Bank lowering rates further to 7.06% by the end of fiscal year 2013/14.
Author: Ricardo Aceves, Senior Economist