RBI cuts interest rates - Mid-Quarter Monetary Policy Review Full Report

Based on an assessment of the current macroeconomic situation, it has been decided to:

• Reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect;

Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect.

Introduction

2. Since the Reserve Bank’s Third Quarter Review (TQR) of January 2013, global financial market conditions have improved, but global economic activity has weakened. On the domestic front too, growth has decelerated significantly, even as inflation remains at a level which is not conducive for sustained economic growth. Although there has been notable softening of non-food manufactured products inflation, food inflation remains high, driving a wedge between wholesale price and consumer price inflation, and is exacerbating the challenge for monetary management in anchoring inflationary expectations.

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Global Economy

3. Global economic developments over the last few months present a mixed picture. US GDP estimates for Q4 of 2012 indicate a tentative upturn on the back of improvement in housing and payroll employment. However, US macroeconomic prospects are clouded by the uncertainty surrounding the temporary appropriations and the debt ceiling. In the euro area, plagued by contingent risks of political uncertainty and adjustment fatigue, GDP shrank for the third successive quarter in Q4. Output in Japan too contracted in Q4, and it is as yet unclear how effective the

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