RBI again eases repo by 0.25 %; warns further cuts unlikely soon

The Reserve Bank of India today obliged finance minister P Chidambaram – a strong proponent of an easier monetary policy – by cutting its benchmark repurchase or repo rate 25 basis points or 0.25 per cent.

This is the second rate cut in the first three months of this calendar year. In January RBI had cut the repo rate, at which the central bank lends to commercial banks, by a similar 25 basis points.

The rate now stands at 7.5 per cent, down from the earlier 7.75 per cent. Other rates, including the cash reserve ratio (CRR, or the amount banks must keep parked with RBI) remain unchanged.

The CRR remains at 4 per cent.

However, RBI governor Diruvvi Subbarao made it clear in the central bank's mid-term policy review statement that the scope for further policy easing is limited in view of still uncontrolled inflation, particularly in retail prices, along with a record 5 per cent current account deficit.

"Even as the policy stance emphasis addressing the growth risks, the headline for further monetary easing remains quite limited," the RBI said.

India's economy is on track to grow at its slowest in a decade at around 5 per cent in the fiscal year ending this month, and is expected to see modest improvement in the coming year. The Reserve Bank and government planners are torn between the conflicting needs to boost industrial borrowing and control inflation.

"The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this but not sufficient," the RBI said.

The RBI said that an interest rate cut alone will not help achieve the objective of reviving investment and called for easing supply constraints and staying the course on fiscal consolidation.