India cuts rates after 9-month wait, RBI stays cautious

Tue Jan 29, 2013 3:49am EST
 
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By Suvashree Dey Choudhury and Aradhana Aravindan

MUMBAI (Reuters) - India's central bank lowered its key policy rate for the first time in nine months on Tuesday, but struck a cautious note on further easing as it waits to see how the government's upcoming budget aims to bring a bloated fiscal deficit under control.

The Reserve Bank of India cut the policy repo rate by 25 basis points (bps) to 7.75 percent to help support an economy set to post its slowest annual growth rate in a decade.

The size of the cut was in line with forecasts in a Reuters poll of analysts earlier this month. The central bank gave guidance back in October that it could reduce rates during the January-March quarter, and Indian bond and stock markets were largely unmoved as dealers had already priced in the move.

But the RBI unexpectedly also reduced the cash reserve ratio (CRR), the share of deposits that banks must keep with the central bank, by 25 bps to 4.00 percent, which will infuse an extra 180 billion rupees ($3.4 billion) into the banking system.

The central bank stressed that halting a slide in growth had become critical, but it went on to list constraints, notably worryingly high current account and fiscal deficits, and the risk that inflation could flare again.

"Monetary policy stance has sought to balance the growth-inflation dynamic through calibrated easing," the RBI said in its quarterly monetary policy review.

"It is now critical to arrest the loss of growth momentum without endangering external stability."

INFLATION SEEN SETTLING FOR NOW   Continued...