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As expected, the RBI kept its monetary policy focussed on inflation control and kept all key rates unchanged
The Reserve Bank of India (RBI) on Tuesday kept key rates unchanged in its quarterly review, while lowering its growth projection to 6.5% and cutting statutory liquidity ratio (SLR- the amount of deposits banks park in government bonds) by 1% to 23%.
"The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term. In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," the central bank said in a statement.
The RBI has kept, repo rate (the rate at which the RBI lends money to banks) unchanged at 8.0%. Similarly, the reverse repo rate (the rate at which the RBI borrows from banks) and cash reserve ratio (CRR) remain unchaged at 7.0% and 4.75%, respectively.
The central bank has reduced SLR of scheduled commercial banks to 23% from 24% of their net demand and time liabilities (NTDL) from the fortnight beginning 11 August 2012. This move to lower the SLR, however may not be effective as banks' average SLR holdings are already around 30%.
Industry body, Confederation of Indian Industries (CII), while welcoming the cut in SLR, said it is disappointed with RBI's decision to maintain status quo in policy rates. In a statement, Chandrajit Banerjee, Director General, CII, said, "...growth of bank credit to the commercial sector has gone down as the private sector is delaying investment due to high cost of credit. A cut in policy rates, at this juncture, would have done much to infuse liquidity in the system which is facing tight liquidity conditions, spur investments among corporates and rev up growth momentum in the economy."
RBI cut the GDP growth forecast to 6.5 per cent from the earlier projection of 7.3 per cent in view of the ongoing global economic slowdown.
Taking note of the deficient monsoon rains and subdued prices of petroleum products, it raised its fiscal-end inflation projection to 7%, from 6.5% earlier.
This is the second consecutive time, RBI Governor D Subbarao has left the key interest rate unchanged to fight inflation, and lowered the growth projection for the current fiscal.
Stocks markets reacted negatively to the policy and the BSE 30-stock index, Sensex, fell over 71 points in early noon trade after it had trading 55 points up in the morning.
Reacting on the RBI policy, Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd, said, "The policy inaction continues to send negative signals with hopes of near term easing nearly ruled out. RBI has made a rather big bet on sacrificing growth in the hope of near term stability - somewhat ignoring the stability risk that a lower growth can possibly endanger. Growth risks are only compounding further with investment cycle getting no help from either fiscal or monetary side. Coupled with policy paralysis, this might endanger a rating slippage."
The headline or Wholesale Price Index (WPI) based inflation in June was 7.25%, while at the retail level it was at an alarming 10.02%.
The pro-growth lobby, which is worried over the growth slipping to nine-year low of 5.3% in the January-March quarter, wanted RBI to bring down the high-rate structures to induce faster economic expansion.
RBI has refused to give-in to the demands, saying that "in the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth".
In its earlier mid-quarterly review on 16th June, RBI had kept the policy rates unchanged to combat high inflation.
RBI today flagged external risks emanating from the Euro area and 'fiscal cliff' in the US, uncertainties on commodity prices, deficit monsoons and the "twin deficits" as risks to the monetary policy.
"Failure to narrow the twin deficits (current account deficit and fiscal deficit) with appropriate policy actions threatens both macroeconomic stability and growth sustainability," RBI said, adding that financing of fiscal deficit through domestic savings will crowd out private investment, harming growth.
CAD for FY12 was at a 30-year-high of 4.2% of GDP, up from 2.7% in 2010-11. The government has also been unable to rein in the fiscal deficit at the budgeted levels. It shot up to 5.9% last fiscal as against the budgetary target of 4.6%.
RBI also advised the government to take immediate steps to control fertiliser and fuel subsidies and keep them under 2% of GDP.
The central bank said it will continue with open market operations to ensure adequate liquidity. It had injected Rs86,000 crore in the financial system during the first quarter.
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