Despite ‘sticky’ inflation,RBI may cut rate to boost growth

Reserve Bank said that it would shift focus to arrest declining growth

Written by ENS Economic Bureau | Mumbai | Published: April 17, 2012 1:03 am

Amid widespread expectations of a cut in rate for the first time in three years,the Reserve Bank said today that it would shift focus to arrest declining growth while keeping inflation under control.

In its report ahead of its policy review tomorrow,the central bank sounded a cautious note by stating that the “inflation path for 2012-13 is likely to be sticky…with the probability of further significant moderation being small”. Markets,analysts and even the government are expecting a 25 basis points cut in repo rate — the rate at which the RBI lends funds to banks — to kickstart growth. Some bankers said the RBI might opt for a cut in cash reserve ratio to inject more funds into the system.

Though the government today announced a marginal dip in the annual rate of inflation to 6.89 per cent in March from 6.95 per cent in February,the RBI said inflation might remain at current levels “due to high oil prices,large suppressed inflation,exchange rate pass-through,impact of freight and tax hikes,wage pressure and structural impediments to supply response”.

The RBI’s observations are being interpreted by analysts as unlikelihood of more rate cuts in the current fiscal.

The RBI has held the repo rate steady since its policy review in mid-December,after raising it 13 times from March 2010 to tame high inflation,most recently in October 2011. The last rate cut was in April 2009.

The RBI said that early indicators suggest that growth may have bottomed out. Global uncertainties and domestic cyclical and structural factors lowered the growth to below seven per cent in 2011-12.

RBI’s observations

Agriculture: Prospects for agriculture are encouraging. The RBI’s own assessment of leading indicators suggests that the 2012 monsoon may be normal

Industry: Revival in the industrial sector hinges on the impetus to ease supply-side constraints. Government initiatives to revive the power sector would be helpful in reviving the growth momentum

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