The Reserve Bank of India (RBI) Governor D Subbarao informed reporters that there would be more room for monetary policy actions if inflation eases further and the current account deficit moderates further.
He said this after announcing the decision of the RBI to reduce repo rate by 25 basis points and cash reserve ratio (CRR) of scheduled commercial banks by 25 bps in the third quarter monetary policy review.
According to the RBI forecast, the current account deficit (CAD) may exceed 5.4 percent of GDP recorded in July-September quarter, 2012-13.
The central bank reduced its baseline WPI inflation projection for March 2013 to 6.8 percent from 7.5 percent set out in the second quarter review. However, the rate of food inflation continues to be persisting.
RBI also revised the GDP growth to forecast to 5.5 percent in 2012-13 as against 5.7 percent estimated earlier.
Meanwhile, banks assured RBI that they would pass on the cut in repo rate to borrowers.However, banksÂ’ net interest margin will contract due to this. They also expressed their inability to reduce deposit rates.
According to Subbarao, the CRR cut was actually aimed at giving more liquidity to banks. This will enable banks to slash interest rates.
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