RBI cuts rate, but warns that scope for further policy easing is limited
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Limited scope for further policy easing: RBI

According to the central bank, the unrelenting rise in food inflation is keeping headline wholesale price inflation at elevated levels and consumer price inflation in double digits.

  • March 19, 2013  
  • |  
  • UPDATED   12:46 IST

Anand Adhikari
Reserve Bank of India (RBI) Governor D. Subbarao has reduced the repo rate, the rate at which the central bank lends funds to banks, by 25 basis points to 7.50 per cent. The rate cut is with immediate effect.

However, the RBI has said in its guidance that headroom for further monetary easing remains limited.

While inflation is still not in the comfort zone, Subbarao recently stated that he was encouraged by the firm commitment to fiscal consolidation in Union Budget 2013/14.

According to the revised budget estimates for 2012/13, the gross fiscal deficit was contained at 5.2 per cent by scaling down plan and capital expenditure. The fiscal deficit is targeted at 4.8 per cent in 2013/14 and three per cent by 2016/17.

According to RBI, year-on-year headline WPI (wholesale price index) inflation moved up to 6.8 per cent in February 2013 from 6.6 per cent in January, mainly because of upward revisions in petroleum products.

The unrelenting rise in food inflation is keeping headline wholesale price inflation at elevated levels and consumer price inflation in double digits.

"Also, there is still some suppressed inflation related to administered prices which carries latent inflationary pressures. All this complicates the task of inflation management and underscores the imperative of addressing supply constraints," warned RBI.

The central bank will also continue to provide liquidity through various instruments, including open market operations, so as to ensure adequate flow of credit to productive sectors of the economy.

In the January review, the RBI reduced the cash reserve ratio (CRR) of banks by 25 basis points, effective February 9. It has made open market purchases of Rs 20,000 crore since February, which provided enough liquidity to banks.

The RBI has again reiterated that the foremost challenge to return the economy to a high growth trajectory is to revive investment. "A competitive interest rate is necessary for this, but not sufficient," it said.

The government has to take other measures such as improving governance, bridging supply constraints, and staying the course on fiscal consolidation - both in terms of quantity and quality.