RBI cuts repo rate by 0.25%, but DMK, UPA political crisis undercuts interest rate boost
In line with expectations, the RBI today cut its short-term lending rate, the repo rate, by 0.25 per cent to spur growth and revive investment but sounded a note of caution on further easing of rates on account of high food inflation and current account deficit - however, the expected boost to the markets and economy fell by the wayside as Dravida Munnetra Kazhagam (DMK) a key regional ally of UPA alliance at Centre withdrew support in protest against the government's position on a U.S.-backed United Nations resolution on war crimes carried out during Sri Lanka's civil war against Tamil ethnic minority.
"The foremost challenge for returning the economy to a high growth trajectory is to revive investment. A competitive interest rate is necessary for this but not sufficient," the Reserve Bank said in its mid-quarter review of the monetary policy.
Accordingly, its short term lending rate or the repo was reduced by 0.25 per cent to 7.5 per cent, making it the second consecutive cut in as many months.
The market was widely expecting a cut by 0.25 per cent due to the deteriorating growth which is estimated to touch a decade low of 5 per cent and a cooling in the core inflation to a 35 month low.
He, however said "...even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited."
Expecting the government to begin spending, it left the cash reserve ratio or the amount of deposits banks have to park with RBI,
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