The central bank cut its repurchase rate to 7.5 percent in its mid-quarter policy review and reduced its reverse repo rate, the rate at which it can borrow from banks, to 6.5 percent. The cash reserve ratio for banks remained at four percent, as expected, Reuters reports.
The Dravida Munnetra Kazhagam, a large political ally of the RBI, said it would suspend its support for Prime Minister Manmohan Singh, raising doubts about the ability of Singh’s administration to enact reform and regain investor confidence. Singh’s administration would be 44 seats short of a majority without the support of the DMK, which could hinder its ability to pass legislation.
“This political development means scope for tough reform decisions is pretty much on the backburner,” Rajeev Malik, an economist at CLSA Asia-Pacific Markets, said, adding that the government’s ability to implement a fiscal relief plan and other changes will influence the RBI, according to Reuters.
India’s economy is on-track to grow at about five percent in the fiscal year ending this month, the slowest pace in 10 years, and analysts expect only modest growth in the coming year. Rising consumer inflation influenced by food prices, an increase in wholesale inflation and a high deficit have hindered the government’s attempts to spur growth and recovery in the economy.
“Even as the policy stance emphasizes addressing the growth risks, the headroom for further monetary easing remains quite limited,” the RBI said, Reuters reports.
The DMK withdrew its support of Singh’s administration over a dispute regarding the government’s reaction to alleged war crimes in Sri Lanka, though it did indicate that it would restore its support if certain demands are met, according to Reuters.