Key highlights of RBI policy

• Repo rate cut by 25 basis points. RBI Governor D Subbarao noted that there is limited room to ease monetary policy further as headline inflation remains above comfort levels. The repo rate now stands at 7.25 percent.
• Cash Reserve Ratio remained unchanged at 4 percent.
• RBI pegs economic growth for current fiscal at 5.7 percent.
• RBI says growth to remain subdued in first half of FY14. Economic activities expected to show only modest improvement. Industrial activity outlook remains subdued.
• Headline inflation will remain range-bound around 5.5 percent level in 2013-14
• *RBI said it will aim to reach 5 percent WPI inflation by March 2014
• RBI investigations revealed need for better regulatory compliance by banks. Advise banks to ensure transparent pricing of loans.
• RBI proposes doubling of priority sector lending limits to MSMEs to Rs 5 crore.
• FY14 Bank credit growth projection at 15 percent
• Biggest risk to economy stems from Current Account Deficit. Likelihood of capital flight due to growth concerns in advanced economies.

The biggest risk the central bank sees to the economy is the ballooning current account deficit (CAD) which remains well above the sustainable level of 2.5 percent of GDP. In fact, the central bank goes on to say that even if one accounted for the fact that the fiscal deficit is “programmed to decline,” the CAD was still high. “Large fiscal deficits can potentially spill over into the CAD and undermine its sustainability even further.A large CAD, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities,” the policy statement points out.