RBI cuts repo rate by 0.25%; says further easing will be difficult

The Reserve Bank of India today cut its key policy rate, the repo, by 25 basis points or 0.25 per cent for the third time since January.

The repo rate, at which banks borrow from RBI, now stands at 7.25 per cent, the lowest since May 2011. The cash reserve ratio (CRR) for banks was unchanged at 4 per cent.

The cut was on expected lines amid a slowdown in economic growth and a slight easing of inflationary pressures; but the central bank warned that the scope for further cuts was limited.

Inflation left 'little space" for more easing, RBI governor D Subbarao said, adding that monetary action alone cannot revive growth.

The central bank's mid-quarterly review warned that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy.

"The balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further monetary easing," the RBI wrote in its policy statement.

India's headline inflation in March fell to its lowest in more than three years at 5.96 per cent, but the consumer price index remained elevated at 10.39 per cent.

The current account deficit swelled to a record 6.7 per cent of GDP in the December quarter. While it is expected to ease on lower global commodity prices and a rise in exports, it is on track to remain well above the 2.5 per cent level that is seen as sustainable.

"Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardising our macro-financial stability," the RBI said.

The central bank said it expects the economy to grow at 5.7 per cent in the fiscal year that started in April, and projected headline WPI inflation at around 5.5 per cent during the year.

It said its intention is to lower WPI inflation to 5 per cent by March 2014 "using all instruments at its command".

The RBI once again urged the government to take measures to ease supply constraints in the economy and encourage investment.

"Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge," it said.