Inflation still a concern for RBI as rates left unchanged

Containing inflation remains the foremost priority for the Reserve Bank of India (RBI), which decided Thursday to keep key interest rates unchanged in its mid-quarter monetary policy decision.

The central bank said a surge in crude prices had increased the upside risks to inflation. Indian meets majority of its oil needs through imports. Inflation based on wholesale price index which had slipped to a low of 6.6 percent in January, rebounded to
almost 7 percent in February.

“On the basis of the current macroeconomic assessment, it has been decided to keep the policy repo rate under the liquidity adjustment facility unchanged at 8.5 percent,” the RBI said while announcing the decision through a statement.

The repo rate or the repurchase rate is the interest the central bank levies on short-term borrowing by commercial banks.

Consequently, the reverse repurchase rate, or interest on short-term lending, also stays at 7.5 percent. The cash reserve ratio also has been left unchanged at 4.75 percent.

In the review Thursday, the RBI also said rate cuts in the future would depend on how soon inflation came down to acceptable levels and indicated that it was willing to tolerate a lower expansion rate in the gross domestic product.

“Recent growth-inflation dynamics have prompted the Reserve Bank to indicate that no further tightening is required and that future actions will be towards lowering the rates,” the central bank said.

GDP growth has been sluggish this fiscal and is estimated to be at 6.9 percent for 2011-12.

“However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions,” the central bank said.

Analysts expect RBI to start easing rates at the monetary policy announcement for 2012-13 on April 17.

The markets, which were not really expecting any rate cuts in this review, reacted negatively.

The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) in a knee-jerk reaction fell 193.61 points or 1.07 to a low of 17,725.69 points, compared to its previous close at 17,919.30 points.

The 50-scrip S&P CNX Nifty of the National Stock Exchange similarly slipped 65.45 points or 1.21 percent to 5,398.45 points.