RBI keeps key rates unchanged as inflation outlook worsens

Mumbai : The Reserve Bank of India (RBI) Tuesday kept key policy rates unchanged for the second time since June, saying lowering them would raise the inflationary pressure.

In the first quarter review of monetary policy, the central bank kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also stayed unchanged at 7 percent.

the Cash Reserve Ratio (CRR), the amount of funds that the commercial banks have to keep with the RBI, stands steady at 4.75 percent. 

These rates determine the lending and borrowing rates by the commercial banks to general public and corporates.

“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” the RBI said in the review.

However, the central bank cut the statutory liquidity ratio (SLR) by a percentage point to 23 percent to ease the flow of credit to industry.

“The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term. While monetary actions over the past two years may have contributed to the growth slowdown – an unavoidable consequence – several other factors have played a significant role,” Governor Duvvuri Subbarao said in the policy note.

He, however, said the RBI would be “ready to act appropriately” if and when necessary.

Core inflation declined to five-month low of 7.25 percent in June as compared to 7.55 percent in the previous month. But it remains much above the RBI’s comfort level of 4-5 percent. 

This is the second consecutive policy review when the RBI has left key policy rates unchanged. In the mid-quarter review announced June 18, the RBI had left key policy rates unchanged after cutting the rates by 50 basis points in April.

The next mid-quarter review of monetary policy for 2012-13 will be announced Sept 17, 2012.

The central bank said macroeconomic conditions have deteriorated since it announced the monetary policy statement in April when it lowered the rates.

“Much of the global economy is in a synchronised slowdown, having lost the upward momentum seen in the early months of the year,” the RBI said.

The RBI has lowered the growth projection for the current financial year to 6.5 percent, sharply down from 7.3 percent pegged in April.

The country’s gross domestic product expanded by 5.3 percent in the quarter ended March, the weakest in 9 years.