Mumbai, July 31: For the second consecutive time, Reserve Bank of India (RBI) left the key policy interest rate unchanged, showing that bringing down high inflation is top priority of the central bank.
Announcing its credit policy, the RBI said that reduction in policy rates at this point could aggravate already high inflation rather than bolster economic growth, which fell to a nine-year low in the March quarter.
In a token gesture, RBI cut statutory liquidity ratio (SLR) by 100 basis points to 23% from 24%. The SLR cut will be effective from August 11.
With inflation hovering near 7.5% and weak monsoon forecast, RBI took cautious stand against the trend from other countries like China and Brazil which cut policy rates to boost the sagging growth.
“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” RBI Governor D Subbarao said.
In line with the wide view, RBI kept the repo rate -- the rate at which banks borrow money from the RBI -- unchanged at 8%; and accordingly the reverse repo rate is at 7%.
The CRR, or the portion of deposits that banks must keep with the RBI, remains at 4.75%.
On inflation the RBI said, "The stickiness in inflation, despite the significant growth slowdown, was largely on account of high primary food inflation, which was in double-digits during Q1 of 2012-13 due to an unusual spike in vegetable prices and sustained high inflation in protein items.”
As India's growth slowed to a nine-year low of 5.3% Q1, the central bank cut its economic growth outlook for the FY13 6.5%, from the 7.3% projected earlier.
As RBI has raised its headline inflation projection for FY13 to 7% from 6.5% made in last review, possibility of any rate cut in near future seems to be impossibility.
The RBI's next rate review is September 17.
For struggling government of India, it would be a challenge to boost growth as fiscal deficit for the fiscal year that ended in March was 5.76% of GDP, and it is expected to deteriorate further as weak monsoon will force government to announce populist measures.
It would be interest to watch how new Finance Minister P Chidambram, as speculated in power circles, restarts the stalled reform process and better investment sentiment.