RBI cuts rate for now, but says further reductions not a given

The Reserve Bank of India today cut the policy rate by and expected 25 basis points to 7.25 percent but cautioned that there is only little space to further monetary easing. It also projected a bearish 5.7 percent GDP growth for 2013-14.

The bank kept banks’ cash reserve ratio unchanged. Banks had demanded a cut in the CRR to relax the tight liquidity situation in the banking system.

The RBI also sounded guarded about its response to the falling WPI inflation.

[caption id=“attachment_748931” align=“alignleft” width=“380”] The RBI also sounded guarded about its response to the falling WPI inflation.. AFP[/caption]

“Food price pressures, upward revisions in the MSPs and rapid wage increases are leading to a wage-price spiral. 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,” the policy statement said.

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Apart from addressing the accentuated risks to growth, the monetary policy is also intended to “guard against the risks of inflation pressures re-emerging and adversely impacting inflation expectations, even as corrections in administered prices release suppressed inflation”.

The falling commodity prices have not dissipated the RBI’s concerns about the current account deficit.

“Monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance,” it said.

It again prodded the government to act faster on the reforms front.

“Recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation,” it said.

Read the full statement here.