Write Comment     |     E-Mail To a Friend     |     Facebook     |     Twitter     |     Print

MUMBAI:The Reserve Bank of India on Tuesday cut the repo rate by 50 bps to 8%. It left the CRR unchanged at 4.75%. Loans are likely to get cheaper.

The Reserve Bank of India has cut the rates for the first time in three years to revive sagging growth, though inflation pressures and a heavy fiscal deficit are of concern.

India’s industrial output grew in February by a lower-than-expected 4.1 percent after expanding by just 1.1 percent in January, data last week showed.

The RBI hiked interest rates 13 times from March 2010, undertaking the most aggressive monetary policy tightening drive of all major economies, and it has kept rates on hold since late last year.

RBI governor Subbarao said liquidity conditions are moving towards normal after several months of acute shortage of cash in the banking system, but also said the RBI would take "appropriate and proactive" steps if needed to restore liquidity to comfortable levels.

The RBI said its baseline expectation for GDP growth in the fiscal year that ends in March 2013 is 7.3 percent, compared with an expected 6.9 percent in the just-completed year. It expects headline inflation to end the year at 6.5 percent, with little deviation expected during the year.

Sluggish capital investment has exacerbated bottlenecks in the Indian economy, bringing down its capacity for non-inflationary growth to an estimated 7 percent, from 8.5 percent before the global financial crisis. Supply shortages persist in infrastructure, energy, minerals and skilled labour.

"A strategy to increase the economy’s potential by focusing on these constraints is an imperative," Subbarao said.

He also reiterated the need for the government to cap a subsidy burden, which led to a bloating of the fiscal deficit in the recent fiscal year to 5.9 percent of GDP.

A weakened government has been unwilling to pass along the price of higher global oil prices to end-users, but pressure on the fiscal deficit is expected to force it to do so.

"From the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production," he said.

(With inputs from Reuters)