India's central bank cuts key rates, says little room for more

With inflation still a worry, India's central bank Tuesday cut its short-term lending and borrowing rates by just 25 basis points and left the reserve ratios that also control money available for auto, home or commercial loans unchanged.

The decision, which came with a guidance that there was limited scope for further easing of interest rates, was taken by Reserve Bank of India (RBI) Governor D. Subbarao during a mid-quarter review of the monetary policy for the current fiscal.

The repurchase rate, or the interest on short-term borrowings by commercial banks, has been cut from 7.75 percent to 7.5 percent and the reverse repurchase rate, or interest on short-term lending, automatically stands lowered to 6.5 percent against 6.75 percent.

But with inflation rate still beyond the central bank's comfort zone, the cash reserve ratio, or the money commercial banks have to retain in the form of liquid assets in proportion to their deposits, has been kept unchanged at 4 percent.

Experts feel this token cut in interest rates -- along with a warning of limited scope for more -- leaves little room for commercial banks to lower the interest rates on auto, home and commercial loans.

"Since the Reserve Bank's third quarter review of January 2013, global financial market conditions have improved, but global economic activity has weakened," the central bank said in a statement. 

"On the domestic front, too, growth has decelerated significantly, even as inflation remains at a level that is not conducive for sustained economic growth," the apex bank said.

"Even as the policy stance emphasis addressing the growth risks, the headroom for further monetary easing remains quite limited."

The corporate sector was none-too-enthused by decisions, with the Associated Chambers of Commerce and Industry (Assocham) saying investor sentiments have been dampened with the guidance that the headroom for further monetary policy easing remains quite limited. 

"In a way, what RBI is telling us that is we must learn to live with high interest rates scenario even as Governor D. Subbarao himself has expressed concern over slowdown in the economy," said Assocham president Rajkumar N. Dhoot.

India's annual inflation rate based on wholesale prices rose to 6.84 percent in February compared to 6.62 percent in the previous month due to a sharp increase in fuel, food and vegetables prices, even as that for manufactured products eased to 3.8 percent.

As regards retail prices, the inflation rate based on consumer price index jumped to 10.91 percent in February compared to 10.79 percent in the previous month.