RBI cuts Repo Rate by 25 bps

Reserve Bank of India Governor Raghuram Rajan cut interest rates for the third time since January in a delicate balancing act aimed at shoring up a tentative economy . Much depends on the June-September monsoon and the government's response to a possibly poor rainy season, he said.
“I would characterise (the policy) as neither conservative nor aggressive. It's in some sense a Goldilocks policy -just right given the current situation,“ Rajan said at a news conference after Tuesday's monetary policy review. The Reserve Bank cut the key repo rate by 25 basis points, or 0.25 percentage point, to 7.25%.
Despite the various imponderables, “a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty“, Rajan said.
The governor then told banks, and not for the first time, what they needed to do to make the policy change effective. “Banks should pass through the sequence of rate cuts into lending rates.“ Rajan conceded that banks have been reducing interest rates on deposits, which should ideally translate into lower borrowing costs. But he elaborated on the weakness of the Indian banking system. Rajan also elaborated on how the Indian banking system needs capital to fund debt that's gone bad and to provide credit when the investment cycle gathers momentum.
The governor's words were heeded -State Bank of India cut its base rate in the evening, followed by Allahabad Bank, Dena Bank and Punjab & Sind Bank. The policy's tone was muted, particularly in comparison with some of the pronouncements that have emanated recently from the government on economic revival prospects. RBI's growth estimate for the year was reduced to 7.6% from 7.8% and its inflation forecast was raised by 20 basis points to 6% by the fiscal year-end.
“The government and RBI agree that these cuts signify that the economy needs policy support as economic growth is recovering while the external environment remains weak,“ said Arvind Subramanian, chief economic advisor. “The government and RBI will work together to ensure that the macroeconomic (position) remains strong while investment and growth are accelerated towards their potential.“
In its policy statement, the central bank cited three concerns on prices. “First, some forecasters, notably the IMD (India Meteorological Department), predict a below-normal southwest monsoon. Astute food management is needed to mitigate possible inflationary effects. Second, crude prices have been firming amidst considerable volatility , and geopolitical risks are ever present. Third, volatility in the external environment could impact inflation,“ it said.