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Reserve Bank of India leaves key rates unchanged

Last updated on: July 31, 2012 12:28 IST

Reserve Bank of India leaves key rates unchanged

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For the second consecutive time, Reserve Bank Governor D Subbarao on Tuesday left the key interest rate unchanged to fight inflation, and lowered the growth projection for the current fiscal to 6.5 per cent.

However, as a liquidity inducing-measure, the Governor brought down the Statutory Liquidity Ratio -- the amount of deposits banks park in government bonds -- by 1 per cent to 23 per cent, effective August 11.

The key lending (repo) rate, at which banks borrow from RBI, has been retained at 8 per cent despite demands from the industry to cut interest rates to spur economic growth.

The cash reserve ratio -- the amount of deposits banks keep with RBI in cash -- has also been retained at 4.75 per cent.

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Image: Vendors hold bags of cotton candy for sale as they look for customers in New Delhi.
Photographs: Ahmad Masood/Reuters

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"The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term. . .lowering policy rates (now) will only aggravate inflationary impulses without necessarily stimulating growth," Subbarao said in the first quarter monetary policy review.

Its move to lower the SLR may not be effective as banks' average SLR holdings is already around 30 per cent. RBI cut the gross domestic product growth forecast to 6.5 per cent from the earlier projection of 7.3 per cent in view of the ongoing global economic slowdown.

Taking note of the deficient monsoon rains and subdued prices of petroleum products, it raised its fiscal-end inflation projection to 7 per cent, from 6.5 per cent earlier.

Stocks markets reacted negatively to the policy and the BSE 30-stock index, Sensex, fell over 71 points after it had trading 55 points up in the morning trade.

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Photographs: Siphiwe Sibeko/Reuters

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The headline or Wholesale Price Index-based inflation in June was 7.25 per cent, while at the retail level it was at an alarming 10.02 per cent.

The pro-growth lobby, which is worried over the growth slipping to nine-year low of 5.3 per cent in the January-March quarter, wanted RBI to bring down the high-rate structures to induce faster economic expansion.

RBI has refused to give-in to the demands, saying that 'in the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth'.

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In its earlier mid-quarterly review on June 16, RBI had kept the policy rates unchanged to combat high inflation.

RBI on Tuesday flagged external risks emanating from the Euro area and 'fiscal cliff' in the US, uncertainties on commodity prices, deficit monsoons and the 'twin deficits' as risks to the monetary policy.

"Failure to narrow the twin deficits (current account deficit and fiscal deficit) with appropriate policy actions threatens both macroeconomic stability and growth sustainability," RBI said, adding that financing of fiscal deficit through domestic savings will crowd out private investment, harming growth CAD for FY'12 was at a 30-year-high of 4.2 per cent of GDP, up from 2.7 per cent in 2010-11.

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Image: A worker counts US dollar bills at a money changer.
Photographs: Romeo Ranoco/Reuters

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The government has also been unable to rein in the fiscal deficit at the budgeted levels.

It shot up to 5.9 per cent last fiscal as against the budgetary target of 4.6 per cent.

RBI also advised the government to take immediate steps to control fertiliser and fuel subsidies and keep them under 2 per cent of gross domestic product.

The central bank said it will continue with open market operations to ensure adequate liquidity.

It had injected Rs 86,000 crore (Rs 860 billion) in the financial system during the first quarter.

 

 




Photographs: Mukesh Gupta/Reuters

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