India's central bank on Tuesday decided to leave its key rates unchanged as widely expected as policymakers focus on maintaining inflation under control amid slowing growth.
The Reserve Bank of India (RBI) left the repo rate unchanged at 8 percent and the reverse repo at 7 percent. 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 previous change in the key rates was in April, when the rates were slashed by a 50 basis points.
"The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term," the RBI said. The bank now faces the challenge of containing inflation, while maintaining growth.
Lowering policy rates in the current situation will only aggravate inflationary impulses without necessarily stimulating growth, the bank said in its first quarter review.
The RBI also kept its cash reserve ratio unchanged at 4.75 percent as expected. The bank has reduced the ratio in January and March this year.
In order to improve credit flow, the RBI reduced the statutory liquidity ratio (SLR) of scheduled commercial banks to 23 percent from 24 percent, with effect from August 11. The SLR is the percentage of total deposits that banks should maintain as reserves via investment in liquid assets such as government bonds.
Assuring markets, the bank said managing liquidity within the comfort zone remains an objective and the bank will respond to liquidity pressures, including by way of open market operations.
The bank said the latest policy actions are expected to anchor inflation expectations and maintain liquidity to facilitate smooth flow of credit to productive sectors to support growth.
Citing trends in food inflation and global commodity prices, the RBI lifted the baseline projection for WPI inflation for March 2013 to 7 percent from 6.5 percent.
The uneven and deficient monsoon will have an adverse impact on food inflation, the bank said. All the more, the pass-through rupee depreciation to import prices is expected to add further upward pressure on domestic fuel price inflation.
As monsoon has been deficient and industrial activity remains weak, the RBI trimmed its 2012-13 growth estimate to 6.5 percent from 7.3 percent. Moreover, the bank said the slower global growth as well as an expected slowdown in service sector expansion will possibly act as a drag on the economy.
Earlier this month, the International Monetary Fund cut its 2012 growth forecast for India to 6.1 percent from 6.8 percent. For 2013, the IMF sees 6.5 percent expansion.
According to the central bank, the Indian economy faces the "twin deficit" risk on current account and fiscal account.
Financing fiscal deficit from domestic saving will crowd out private investment, in turn lowering growth prospects, the RBI pointed out. The growth slowdown will ultimately deter capital flows, making it harder to finance current account deficit, it cautioned.
by RTT Staff Writer
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