Reserve Bank of India Cuts Key Interest Rate To Boost Growth

IndusView, Tuesday 19 March 2013 (London): The Reserve Bank of India (RBI) today reduced its key lending rate by 0.25 basis points to 7.50%, in an attempt to boost growth as inflation remains in check, in the third cut since April last year.

While the Wholesale Price Index (WPI) rose to 6.84% in February as compared to 6.62% for the previous month, the non-food manufacturing inflation, which the RBI uses to gauge demand-driven price pressures, surprisingly came down to 3.8%, the lowest since March 2010. Manufacturing goods inflation dropped to 4.51% in February from 4.81% a month ago. Food inflation also slowed down to 11.38% during the month from 11.88% in January.

“A mantra of growth now permeates the RBI’s corridors,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “Three rate cuts in a year shows that the RBI is in harmony with the government’s attempts to revive growth.”

Indian business leaders and the government have been calling for months for that cut to help the once-booming economy, forecast to see a 5% growth rate in the year to March 2013, the weakest in a decade.

The RBI set the stage for reduced rates last April when it dropped its key repurchase rate to 8.00% for the first time since March 2010. At the time of its last cut to 7.75% in Jan. This year, it also reduced the cash reserve ratio (CRR), or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, from 4.25% to 4%. The move was expected to provide $3.35 billion of extra cash for them to lend.

“Slowing economic growth is also a worry for the government as it gears up for a general election due by May 2014,” said Rangar.

Finance Minister P Chidambaram unveiled a 16% surge in spending in the 2013-2014 budget, ahead of 2014 elections but imposed taxes on the rich and large firms to fill in a revenue gap and trim its deficit. The government also announced plans to continue with rolling back fuel subsidies, taxes on income of high net worth individuals and on some luxury items as well as a modest asset sales program to reduce its growing current account deficit.

“The Finance Minister has to steer the country away from the danger of being the first BRIC country to lose investment grade status via a credit downgrade,” said Rangar. “He has a challenging task of revving a growth engine, that sputtered under his predecessor, with the fuel of more foreign capital.”

The RBI opened the door last Thursday (March 14) to foreign institutional investors (FIIs) using investments in corporate and government bonds as collateral in the futures and options segment of stock exchanges. It also said it was permitting FIIs to use their investments in corporate bonds as collateral in the cash segment of the stock market. The move is expected to improve liquidity in the derivative market.

In 2012, Foreign Institutional investments (FII) totaled $10 billion and the country attracted $27.3 billion worth of Foreign Direct investments (FDI).