| RBI keeps rates steady, raises inflation outlook |
MUMBAI The Reserve Bank of India (RBI) left interest rates unchanged on Tuesday for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.
Underlining its policy dilemma as it faces pressure to reduce rates, the Reserve Bank of India (RBI) cut its economic growth forecast for the fiscal year to March 2013, while at the same time raising its inflation forecast.
The RBI left its policy repo rate at 8 per cent and cash reserve ratio for banks at 4.75 per cent. The CRR is the share of deposits banks must keep with the RBI. The central bank, however, lowered the statutory liquidity ratio (SLR) — the amount of deposits banks park in government bonds — by 1 per cent to 23 per cent.
“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” Governor Duvvuri Subbarao wrote in the monetary policy review.
The RBI’s primary focus remains inflation control, he added. The central bank’s hard line on rates sits in contrast to many other central banks that are easing credit conditions to try to bolster economies feeling the impact of the euro zone debt crisis. The stance maintains pressure on Prime Minister Manmohan Singh’s government to rein-in populist subsidy spending and take other steps to bolster an economy growing at its weakest pace in almost a decade as companies hold back on investment and a creaking infrastructure stunts growth as it adds to business costs and so fuels inflation. A massive grid failure hit India for the second straight day on Tuesday, cutting power for hundreds of millions of people in the north and east of the country, calling attention to underinvestment in a power sector unable to keep up with demand.
Many economists expected the central bank to resume cutting rates only in the second half of the fiscal year, and modestly at that.
Weaker-than-normal rains in India this summer complicate monetary policy. Higher food prices are beyond the reach of monetary policy, but can fuel inflationary expectations and tempt the government to spend more on subsidies.
“Given the inflationary risks and pressures, which I don’t see going away, we will continue to see high inflation in the rest of the year,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
Wholesale price inflation remained above 7 per cent in June and consumer price inflation was 10 per cent. Growth in Asia’s third-largest economy slowed to a nine-year low of 5.3 per cent in the March quarter.
On Tuesday, the central bank cut its economic growth outlook for the fiscal year that ends in March to 6.5 per cent, from the 7.3 per cent assumption made in April, putting its outlook closer to that of many private-sector economists.
It also raised its headline inflation projection for March 2013 to 7 per cent from 6.5 per cent in its April review, further denting market hopes for policy easing in the near term.
The central bank unexpectedly cut the minimum requirement for banks’ government bond holdings to 23 per cent of deposits from 24 per cent, a move to free up liquidity. However, some bankers said the cut was unlikely to spur more lending given worries about deteriorating credit quality.
The 10-year benchmark bond yield was up 9 basis points at 8.24 per cent from its previous close, after rising to as much as 8.28 per cent. The 5-year OIS rate rose 10 bps to 7.10 per cent, while the 1-year rate rose 4 bps to 7.68 per cent.
The Sensex recovered from earlier disappointment over the weakening prospects for near-term rate cuts and was up 0.55 per cent in late trade, pulled by strong regional gains.
Reuters
|
 |
|
|
| NEWS UPDATES |
|
|
|
|
|
|
