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India Leaves Key Rates Unchanged

India Leaves Key Rates Unchanged

India's central bank retained its key interest rates as well as the cash reserve ratio as stubborn inflation prompted it to resist calls for policy easing. However, the bank reiterated its guidance to focus policy on growth in the quarter ahead.

The Reserve Bank of India, or RBI, left the repo rate unchanged at 8 percent and the reverse repo at 7 percent at its mid-quarter review on Tuesday. The repo rate is the rate at which the central bank lends to banks and the reverse repo rate is the rate at which it accepts deposits from banks.

The central bank headed by Duvvuri Subbarao also retained its cash reserve ratio at 4.25 percent. The bank was widely expected to cut the CRR by 25 basis points after slashing it by a similar size in October.

Though consumer price inflation remains stubborn, the bank said the pace of moderation in wholesale price inflation has been faster than anticipated. It forecasts inflationary pressure to ease somewhat in the months ahead.

In the face of ebbing inflation pressures, monetary policy has to increasingly shift focus on growth from this point onwards, the central bank said. Moreover, the bank added that liquidity conditions will be managed with a view to supporting growth, thereby preparing the ground for further shifting the policy stance to support growth.

Recent inflation patterns and projections provide a basis for reinforcing October guidance about monetary policy in the fourth quarter, the RBI noted. Even as policy focus shifts towards growth, the stance will remain sensitive to inflation risks, the bank said.

In October, the RBI lifted its headline wholesale price inflation for March 2013 to 7.5 percent, while trimming the growth projection to 5.8 percent. Inflation based on the wholesale price index eased to 7.24 percent in November from 7.45 percent in the previous month.

Yesterday, India's government downgraded its economic growth projection for the current fiscal year. The economy is forecast to expand in the range of 5.7 percent to 5.9 percent during 2012-2013, down from 7.6 percent estimated in the budget.

The government said there is scope for monetary policy easing as inflation is set to slow over the January to March quarter. It expects inflation to moderate to around 6.8 percent to 7 percent at the end of March.

by RTT Staff Writer

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