In line with its cautious stance, the Reserve Bank of India today pared the repo rate by 25 basis points to 7.25 per cent and left the cash reserve ratio unchanged at 4 per cent.

As the economy slowed and the WPI inflation ebbed, the industry had expected the central bank to not just cut the repo rate (the interest rate at which it lends short-term funds to banks) but also pare the CRR (the slice of deposits that banks park with the RBI).

The disappointment was reflected in the stock market, with Sensex falling 160 points at 19575.64.

Today’s rate cut is no cheer to the common man either as banks are unlikely to cut lending rates immediately. Deposit rates are likely to stay at current levels for some more time.

Asked if banks will cut lending rates, RBI Governor D. Subbarao said: “We can only do so much...What we gathered from banks is that transmission (lending rate cuts) will take place in the next 3-6 months. It will be transmission not just of the cut this morning but of all the cuts over the last nine months.”

The Governor said monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation.

On why the CRR was not cut, Subbarao said there is considerable buffer liquidity in the form of excess investment in government securities, unutilised export credit refinance, and access to marginal standing facility with the banks all aggregating to Rs 5 lakh crore that can be accessed.

But a riposte came from SBI Chairman Pratip Chaudhuri, who said, “There is nothing to transmit. There is no scope to cut rates. There isn’t much credit demand from the corporate side. Home and car loans continue to be strong and till such time that we have enough deployment there, we do not think there is any compulsion to cut rates.”

INFLATION CONCERNS

On inflation, the RBI’s key worry, the Governor said threats come from demand-supply imbalances (in food and infrastructure segments), the correction in administered prices (of diesel and coal) and pressures from increases in minimum support price of farm commodities . Any financing of the Current Account Deficit could lead to a swift reversal of the policy stance, he cautioned.

Considering the demand-supply balance, the outlook for commodity prices, and the forecast of a normal monsoon, the wholesale price index inflation may be range-bound at 5.5 per cent in 2013-14.

GDP growth

The RBI has projected baseline GDP growth for 2013-14 at 5.7 per cent. Economic activity is expected to show only a modest improvement. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps.

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