The Reserve Bank has cut the repo rate, its key policy rate, by 50 basis points to 8 percent, giving in to widespread demand from banks, businesses and investors.
The cash reserve ratio has been left unchanged.
This is the RBI’s first policy rate cut in three years. The central bank has hiked rates 13 times since March 2010 in a bid to stamp out inflation.
The rate cut indicates that the central bank has now given priority to the task of arresting a decline in growth over inflation, which continues to face considerable pressure to rise higher.
“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation,” it said in a statement.
“However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.”
Nevertheless, the cut will provide much cheer to investors who had expected a 25 basis cut in the repo rate.
The Reserve Bank also projected GDP growth of 7.3 percent for the current financial year (2012-2013). However, it cautioned that monetary policy alone would not be enough to boost the economy. “It must be emphasised that the main reason for the apparent decline in the trend rate of growth relative to the pre-crisis period is the emergence of significant supply bottlenecks on a variety of fronts — infrastructure, energy, minerals and labour. A strategy to increase the economy’s potential by focussing on these constraints is an imperative,” the policy document noted.
Furthermore, the central bank admitted inflation was unlikely to cool much further. “Keeping in view domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for WPI for March 2013 is placed at 6.5 percent. Inflation is expected to remain range bound during the year.”
For the entire statement, click here.