In keeping with demands by industry as well as the Finance Ministry, the Reserve Bank of India on Tuesday cut the benchmark rate cut by 25 basis points to 7.25%,. The latest cut takes the number of rate cuts this calendar year to three; the central bank had cut the repo rate by 25 basis point cut earlier in January and March, taking the total reduction in interest rate to 50 bps. One basis point is one-hundredth of a percentage point.
Both CRR and SLR rates have been left unchanged
RBI Governor Raghuram Rajan had earlier made rate cuts contingent on a mix of factors, including lower inflation, managing the fiscal deficit and the government’s ability to deliver more on the reforms front, including fixing the country’s infrastructure issues.
Retail inflation has fallen steadily, easing to a four-month low of 4.86% in April, while wholesale price inflation has contracted to -2.65% in the same month.
The fall in inflation comes despite continuing increase in crude oil prices over the past two months and unseasonal rains earlier this year, whose effects may yet be seen in the food basket. Inflation fears also exist because of forecasts of a lower-than-normal monsoon caused by a growing El Nino weather effect.
Other parameters of economic growth have shown some upside; GDP grew 7.3% in FY2015, based on new statistical measures that uses 2011-12 as the base year. Agriculture and allied sectors, which account for the largest number of workers in the country, however, grew a mere 0.2%, below estimates of 1.1%. The Index of Industrial Production (IIP) rose 2.1 per cent in 2014-15, against contraction of 0.5 per cent the previous year. Within that, manufacturing grew 2.2 per cent, against contraction of 1.3 per cent the previous year. Manufacturing activity, as measured by the HSBC Purchasing Managers’ Index (PMI) also grew to a four-month high of 52.6 in May.
However, RBI Governor Raghuram Rajan had been publicly critical of Indian banks failure to adequately pass on the lower repo rates. (Business Standard)
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