The Reserve Bank of India lowered its key policy rate as expected for the first time in nine months to support an economy set for its slowest growth in a decade, but signalled there was less room for aggressive cuts in future due to concerns over inflation.
Following are highlights from the monetary policy statement:
Policy measures
* Cuts repo rate by 25 basis points to 7.75%.
* Reverse repo adjusted to 6.75%.
* Cash reserve ratio cut 25 basis points to 4.00% effective fortnight beginning February 9.
* Marginal Standing Facility rate adjusted to 8.75%.
* Bank rate adjusted to 8.75%.
Policy stance
* Expectations of rangebound inflation in FY14 provides space, albeit limited, for policy to give greater emphasis to growth risks.
* It is critical that even as the monetary policy stance shifts further towards mitigating growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised.
* CRR cut to infuse Rs 18,000 crore into the banking system.
* Financing high current account deficit with volatile capital flows potentially threatens macro-economic, foreign exchange rate stability.
Forecasts
* Baseline GDP growth forecast for FY13 cut to 5.5% from 5.8% earlier.
* Baseline wholesale price index inflation projection for March 2013 cut to 6.8% from 7.5%.
* Cuts M3 projection to 13% from 14% earlier.
* Retains credit growth projection at 16%.
Inflation stance
* Monetary policy will continue to condition, contain inflation perception in 4.0-4.5% range.
* The moderation in inflation conditions provide the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem the growth risks.
* Still high input costs and wages continue to impart upward pressures on prices.
* Further moderation in domestic inflation going into FY14 is likely to be muted as the correction of under-pricing of administered items is still incomplete and food inflation remains elevated.
Growth, economy
* More reforms crucial for raising potential growth path in medium term.
* Critical now to arrest loss of growth momentum without endangering external stability.
* Global growth recovery likely to be anaemic and is also fraught with significant downside risks.
* Sluggish external demand continues to inhibit improvement in services.
* New investment demand, which should be the key driver of the upturn, continues to be weak.
* While the series of policy initiatives by the government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth.
* Investment activity has been way below desired levels and consumption demand has started to decelerate.
Banking sector
* Banks should be discerning in loan decisions, ensure adequate credit flow to productive sectors.
* Risk aversion in banking system due to concerns of asset quality constraining credit flow.
