RBI to base rate cut decisions to factor in current account position

The RBI's base rate cut decisions would be based on the current account position in addition to inflation, governor Duvvuri Subbarao said today.

The Reserve Bank of India (RBI) yesterday cut its key repo rate for the first time in nine months by 25 basis points, supported by a drop in headline as well and core inflation, and the government's effort to curb its spending (See: RBI cheers market with 0.25% cut in policy rates).

Thanks to a record-high current account deficit, a widening fiscal deficit and suppressed inflationary pressures, however, the room for further monetary easing would be likely be limited.

Subbarao told analysts in a post-policy conference call that the bank would take into account what the current account deficit was and it would not be driven just by the inflation number or the inflation trajectory.

A high current account gap caused a weakening of currency and for a country like India that imported around 80 per cent of its oil, it pushed up domestic fuel prices and added to inflationary pressure.

India's current account deficit increased to a record high of 5.4 per cent of gross domestic product (GDP) in the September quarter with the slowing of export growth more sharply than imports, and a similar gap expected in the December quarter.