30.1.13

RBI cuts rates at last



RBI Governor Duvvuri Subbarao met markets more than half way by lowering the benchmark interest rate and banks’ cash reserve ratio, but declined to say if the move heralded the beginning of a lower interest rate cycle. The reduction in two key variables could lead to lower borrowing costs, although bankers caution it may not be too much given the fight among banks for deposits that is raising their cost of funds. The lower rates may ease the pinch for corporates, but again not significantly enough for them to dust off their investment plans or build new factories.
Subbarao’s rate and reserve decisions were overshadowed by the red flags he raised on the record high current account deficit and stubbornly high food inflation, which could force him to reverse his stance in the coming months.
Subbarao cut the repo rate — the rate at which RBI lends to banks — by 25 basis points to 7.75% as expected. It threw in a bonus 25-basis point cut in cash reserve ratio to 4%, which left markets pleasantly surprised and will ease the pressure on the central bank from industry and the government for a supportive monetary policy to aid faltering growth.
The CRR cut will release Rs 18,000 crore into the banking system, and ultimately help the cause of lower interest rates.


Industry reactions to RBI’s moves were mildly positive, even though in the markets, which had penciled in a 25-basis-point rate cut, the initial enthusiasm did not last long. The benchmark BSE Sensex handed back early gains to end the day 0.6%, or 112 points, lower at 19,990. Ten-year government bond yields fell 4 basis points to 7.84% as Subbarao signalled CRR cuts and more bond purchases to improve liquidity. The rupee rose 14 paise to 53.77 per dollar.


RBI lowered its estimate for GDP growth for this fiscal year to 5.5% from 5.8% and that for wholesale price inflation to 6.8% from 7.5%. But the governor, throwing enough hints at the prospect of more troubles for an economy that has been living beyond its means, appeared to suggest that further rate cuts were not a given.
Even as inflation for December fell to a three-year low of 7.18%, with the price rise for manufactured products less than 5%, food prices are climbing. The increase in consumer prices for December got back into double digits, fuelling inflationary expectations. Furthermore, proposed periodic increases in diesel prices and those of items such as coal and power in the months ahead could stoke further price increases.
For RBI, which has long been concerned about high fiscal deficit and runaway inflation, there is now a new demon to slay — the current account deficit, which is the excess of spending overseas than earnings that hit a record high of 5.4% in September and, according to some experts, may have hit 6% in December.



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