RBI Monetary Policy Review March 19, 2013

RBI cuts policy rates by 25 basis points.

Leaves Cash Reserve Ratio unchanged, warns that headroom for further easing is limited.

RBI GOVERNOR, D.Subbarao.

RBI reduced the indicative policy rate, Repo Rate by 25 basis points from 7.75 to 7.5%. Repo rate is the rate at which banks borrow short term funds from the Central Bank.

• The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this, but not sufficient.
  
• Bridging supply side constraints, staying the course on fiscal consolidation, both in terms of quantity and quality and improving governance is much more important to revive growth.
  
• India's GDP in the third quarter of the current financial year, at 4.5% was the weakest it has been in the last 15 quarters. What is worrisome is that the service sector growth has also decelerated to its slowest pace in a decade.
  
• Inflationary pressure and widening current account deficit remained a threat to the economy.
  
• Elevated food prices including pressure stemming from MSP- Minimum Support Price increase, and the wedge between wholesale and retail inflation have adverse implications on inflation expectations.
  
• RBI did not cut the Cash Reserve Ratio(CRR), the portion of the deposits that banks have to keep with the Reserve Bank, which remains at 4%.
  
• RBI will continue to actively manage liquidity through various instruments including Open Market operations(OMO), so as to ensure adequate flow of credit to the productive sectors of the economy.
  
• The Government had critical role to play by remaining committed to fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project implementation.
  
• Coming April or mid- April, there would be much clarity on liquidity position. Then only banks seems to decide on reducing Base Rates.