RBI cuts repo rate by 25 basis points, warns about little room for further easing

The Reserve Bank of India (RBI) on Friday stuck to its cautious stance in the monetary policy review and cut the key interest rate by just 0.25 per cent to 7.25 per cent.

The central bank kept the liquidity enhancing cash reserve ratio (CRR) unchanged at 4 per cent, disappointing the industry and stock market. The BSE Sensex dropped by half a per cent immediately after the announcement.

Justifying the limited easing, RBI Governor D Subbarao said the "monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping public investment".

The decision to leave the CRR unchanged seems to have been driven by an improvement in the liquidity deficit, as the banks are now drawing around Rs 84,000 crore from the overnight window compared to Rs 1.8 lakh crore late last financial year.

RBI expects inflation to hover broadly around the 5.5 per cent mark in the current financial year and said it will deploy "all instruments at command" to bring it down to 5 per cent by March next year.

The upside risks to inflation, which cooled to a three-year low in March, "still remain significant" in the near term on suppressed inflation on the energy front, Subbarao added.

"Overall, the balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further policy easing," he said.

In its annual monetary policy statement, the central bank said there would be modest improvement in the country's economic growth to 5.7 per cent in the current financial year, against the decade's low of 5 per cent in 2012-13.

With inputs from PTI