RBI DISAPPOINTS WITH RATE CUT

Rules out more cuts due to inflation; raises outlook to 5.7%

Mumbai: The RBI cut the repo rate, at which it lends to banks, by a quarter per cent on Friday to 7.25 per cent, but this will not be passed on to the consumers by way of lower personal loans for housing etc. immediately.

The RBI cut the repo rate (rate at which it lends to banks) by a quarter per cent on Friday to 7.25 per cent from 7.75 per cent, but this will not be passed on to the consumers by way of lower personal loans for housing etc., immediately according to bankers.

It also raised the growth rate from 5.2 per cent projected in January to 5.7 per cent for 2013-14 and lowered the inflation rate to 5.5 per cent for the year.

RBI governor Dr D. Subbarao said based on the current and prospective assessment of various economic factors and the dismal 4.5 per cent lowest growth rate in the last quarter, it was decided to cut the policy rate by 25 basis points.

Imported inflation too is likely to be lower due to softening of prices of crude oil and food, but it would also depend on a stable exchange rate. It however said that the upside risks were likely due to food inflation caused by persisting supply imbalances.

Growth could pick up in the second half of the year but it would depend on investment, removal of supply side constraints, easing of fuel supplies for power plants and the global scenario.

He said that interest rates policy alone could not stimulate growth and that sustained revival of growth is contingent upon revival of investment, and removal supply side constraints particularly in infra sector.

The markets gave a thumbs down to the policy and the Sensex dropped 160 points in volatile trade. Corporate India felt that the high interest rate regime is a dampener to growth.

Other red signals for the economy highlighted by Dr Subbarao were the need to revive investment to revive growth. He saw only a modest improvement in growth over last year at 5.7 per cent and said there could be pickup in economic activity only in the second half of the year. Industrial activity “remains subdued as the pipeline for new investment has dried up and existing projects have been stalled by bottlenecks and implementation gaps.”

The global scenario where growth is not likely to pick up will also impact exports while agricultural growth would be dependent on a good monsoon.

He said that banks had access to cumulative liquidity of `5 lakh-crore. Both borrowers and lenders were risk averse and if the economy picks up so will lending and interest rates could come down.