Reserve Bank of India Cuts Interest Rates To Boost Growth, As Expected

The Reserve Bank of India (RBI) has today reduced its interest rates by 25 basis points to 7.25%, in line with expectations, with inflation and global commodity prices moving in a favourable direction.

In March, annual inflation based on the Wholesale Price Index (WPI) came in at 5.96%, the slowest rate in years, down from 6.84% a month earlier. Food prices were at the heart of the slowdown, remaining unchanged between February and March, while fuel and power prices rose 0.36% and the price of manufactured products 0.13%. Annual consumer price inflation figures show inflation slowing to 10.4% in March from 10.9% in February.

“The moderation in WPI inflation set the scene for the RBI, where remains a tension between the competing priorities of stimulating the economy, tackling inflation and considering India’s unsustainable current account deficit,” said Bundeep Singh Rangar, Chairman of London-based advisory firm IndusView. “The rate cut should act as turnaround catalysts for renewed economic activity”.

The World Bank revised its growth forecast for the Indian economy in 2013-2014 to 6.1%, lower than its 7% estimate six months ago. The drop came at the back of lower agricultural growth at 2% instead of the previous 2.7%, even though the country is expecting normal monsoon.

India’s growth has been slowing, and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. India received foreign direct investment (FDI) worth $1.79 billion in February 2013, a decline of about 19% due to global economic slowdown. In February 2012, the country had received FDI worth $2.21 billion.

“There is a need to further improve the business environment. Reforms in the last one year are welcome, but more needs to be done in order to build foreign investors confidence,” said Rangar. “Decline in foreign investments could put pressure on the country’s balance of payments and may also impact the value of the rupee.”

India's trade deficit eased to $10.32 billion in March from $13.54 billion recorded a year ago, much below the analysts’ expectation of a $13.50 billion deficit, as exports rose for the third straight month. Exports rose by 6.97% annually to $30.84 billion in March, while imports for the month declined 2.87% to $41.16 billion aided by a sharp fall in fuel prices.

In its March statement on the balance of payments for the third quarter on fiscal 2013, the RBI said the rise in the import bill was spurred largely by oil and gold imports. Gold has lost some of its sheen among global investors, with the price of the yellow metal down almost $224 per ounce since the beginning of 2013.

 In its previous monetary policy review, on March 19, RBI had reduced the repo rate by 25 bps to 7.50% and kept CRR unchanged. It’s still well above the 6% set two years ago in Sept. 2010.