RBI has announced a cut in the policy interest rate

The Reserve Bank of India (RBI) has announced a cut in the policy interest rate. It has cut both the repo rate as well as the reverse repo rate by 25 basis points (0.25%). The result is that these rates now stand at 7.25% and 6.25%. Since December 2012, this is the third subsequent cut in policy rates that the RBI has undertaken. But despite cutting the rates, the RBI has stated that it is cautious with regards to further rate cuts. The reason for this is the risks in the form of inflation, the current account deficit as well as the impact of further rate cuts on the economy. It has also scaled down its expectation for GDP growth to just 5.7%. Given RBI's renewed hawkish stance, it is unlikely that we would see an interest rates cut unless the deficit situation comes under control. Keeping interest rates high would attract foreign money which in turn can help the current account position. Also, though inflation appears to have eased down in recent times, nevertheless, this decline has been more on the WPI side. The CPI inflation still continues to be above 10%. 


Souce: Reserve Bank of India