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RBI Retains Interest Rates, Indicates Cut From Now On

Mumbai, Dec 16 : Concerned over economic slowdown, the Reserve Bank today kept interest rates unchanged and indicated that it could cut key policy rates from now onwards to arrest falling growth while keeping a
rbi retains interest rates indicates cut from now...
PTI December 16, 2011 14:26 IST

Mumbai, Dec 16 : Concerned over economic slowdown, the Reserve Bank today kept interest rates unchanged and indicated that it could cut key policy rates from now onwards to arrest falling growth while keeping a close vigil on inflation.

“While inflation remains on its projected trajectory, downside risks to growth have clearly increased... Further rates hike may not be warranted,” the Reserve Bank of India (RBI) said in it its mid-quarter review of monetary policy.

The economic growth has come down to 6.9 per cent in the second quarter of the current fiscal from 8.1 per cent in the corresponding quarter in the previous financial year even as inflation remains close to the double-digit mark. The industrial growth registering a negative growth of 5.1 per cent in October too may have prompted RBI to maintain the status quo.

The central bank maintained repo (rate at which banks borrow from RBI) at 8.5 per cent, reverse repo (rate at which the RBI borrows from banks) at 7.5 per cent.  The halt in rate increase comes after 13 hikes since March 2010.

The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at six per cent.

The industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.
“I cannot really speculate on when we might start cutting rates, but certainly that is an event, that an action that is on the way forward...,” RBI Governor D Subbarao said on the sidelines of an event.

The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.

Observing that the rupee is under stress, the policy document said “the timing and magnitude of further actions will depend on continuing assessment of how these factors shape up in the months ahead”. The rupee has depreciated by 17 per cent since August against the US dollar. 

Yesterday, the central bank had put restrictions on forward contracts in rupee to curb speculations in the forex market.

The result was visible today, with the domestic currency appreciating by 74 paise in the early trade.  Welcoming the RBI's status quo on interest rate front, Finance Minister Pranab Mukherjee said the move would help in regaining the economic growth momentum.  “I believe inflation will moderate further in the coming weeks.

I am hopeful today's announcement would help in regaining our growth momentum with improved macro-economic parameter in the remaining period of the fiscal 2011-12,” he said.

On the government's fiscal deficit, which had touched 74.4 per cent of the budgeted estimate in the first seven months 2011-12, the RBI policy document said “the likely slippage in this year's fiscal deficit has inflationary implications”.

The increase in the fiscal deficit is attributed to decline in revenue receipts and increase in expenditure, particularly subsidies.

Expressing concern over the fragile global economic situation, the central bank said it “is closely monitoring the developments in the external sector and it will respond to the evolving situation as appropriate”.

RBI said the global outlook has worsened significantly since October and there is an increasing likelihood of persistent financial turbulence as well recession in Europe. 

On the domestic front, RBI said, “The growth is clearly decelerating. This reflects the combined impact of several factors—the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.”

“It must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand force,” it added Chairman of Prime Minister's Economic Advisory Council (PMEAC) C Rangarajan said the RBI's action is on expected lines and “if inflation continues to show a declining trend, then perhaps the RBI will start reversing its policy”. 

Deputy Chairman of Planning Commission Montek Singh, however, refrained from commenting on the impact of the policy announcement on the economy and market.


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