India's central bank on Thursday decided to keep its interest rates unchanged for the third time, as expected, amid an increase in upside risks to inflation and a slippage in fiscal deficit.
The Reserve Bank of India maintained the repo rate at 8.50 percent. The repo rate is the rate at which central bank lends to banks. The reverse repo, the rate at which the central bank borrows from banks, was retained at 7.50 percent.
The cash reserve ratio, or CRR, was also left unchanged at 4.75 percent after it was unexpectedly reduced from 5.50 percent last week. The unexpected reduction in CRR last week has injected nearly INR 480 billion of liquidity into the banking system. The bank has lowered the ratio by 50 basis points in January.
The bank said last week that such a decision was necessary to address persistent structural liquidity deficit due to advance tax outflows. The liquidity situation has since improved and it is expected to slow further in the coming weeks, it said.
At its mid-quarter monetary policy review, the bank said the slippage in the fiscal deficit has been adding to inflationary pressures. As such, credible fiscal consolidation will be required to shape the inflation outlook.
Although inflation has broadly evolved along the projected trajectory so far, upside risks to inflation have increased due to the recent increase in crude oil prices, fiscal slippage and rupee depreciation.
The headline wholesale price inflation rate moderated to 6.6 percent in January before rising to 7 percent in February.
The RBI said recent growth-inflation dynamics have prompted it to indicate that no further tightening is required and that future actions will be towards lowering the rates.
"Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions," the bank said.
The sluggish demand in advanced economies impairing export growth and rising crude oil prices suggests that the current account deficit is set to remain high, it observed. Going forward, the financing of the current account deficit will continue to pose a challenge.
Weak global economic activity as well as uncertainty in the euro area and rising crude oil prices will possibly hamper growth prospects of emerging and developing economies.
The India Economic Survey, tabled by the Finance Minister in the parliament today, forecast economic growth to rise to 7.6 percent in FY 2013 from an estimated 6.9 percent in FY 2012.
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