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Key rate cut by 25 bps; doubts on further easing

Key rate cut by 25 bps; doubts on further easing
Highlights

RBI cuts reverse repo to 6.5%, CRR retained at 4% Mumbai (PTI): Reserve Bank of India (RBI) on Tuesday cut key policy rate by 0.25 per cent to...

RBI cuts reverse repo to 6.5%, CRR retained at 4% rbi2Mumbai (PTI): Reserve Bank of India (RBI) on Tuesday cut key policy rate by 0.25 per cent to boost growth and revive investment but the impact may not be visible immediately as several bankers are saying they would wait for current fiscal to end before passing on the benefit to home, auto and corporate loan seekers. Unveiling the mid-quarter review, RBI said that the headroom is limited for further easing of rates on account of high food inflation and current account deficit. RBI Governor D Subbarao, said "Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited." "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," the review said. Accordingly, its short term lending rate or the repo was reduced by 0.25 per cent to 7.5 per cent, making it the second consecutive cut in less than two months. The short-term borrowing rate or reverse repo would also come down to 6.5 per cent. However, the Cash Reserve Ratio (CRR) has been retained at 4 per cent on the expectation that government will start spending more.A The RBI stressed that an interest rate cut alone will not be helpful in order to achieve the objective of reviving investment and called for bridging supply constraints and staying course on fiscal consolidation. "The Government has a critical role to play in this regard by remaining committed to fiscal consolidation, easing the supply bottlenecks and improving governance surrounding project implementation," RBI said, acknowledging the "firm commitment" to fiscal consolidation made in the budget. On its guidance, the statement was cautious on further easing and pointed towards the rising current account deficit� which is widely expected to touch a record high at 5 per cent and the expectation of inflation staying range-bound due to fuel price revisions and rising MSPs for agri produce, as the inhibiting factors. This is the third time that the RBI has cut repo rate this fiscal. Last, it had cut repo and CRR by 0.25 per cent each in January.
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