RBI does the unexpected, leaves repo, CRR unchanged

Moneycontrol Bureau

In a bid to tame the inflation demon, the Reserve Bank of India on Monday dissapointed the market by keeping the policy repo rate unchanged at 8% in its mid-quarter monetary policy. The repo is the rate at which, banks borrow from the regulator. Accordingly, the reverse repo rate at which, banks lend money to RBI stands at 7%. 

The cash reserve ratio (CRR) or the share of deposits lenders need to keep with the regulator too remains unchanged at 4.75%.

"The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points," RBI said in its policy statement.

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," it said.

The wholesale price index (WPI) based rate of inflation rose to 7.6% in May as against 7.23% in April, 2012 driven by fuel and food prices. During the same period, the core inflation rate was close to 5% compared with 4.44% a month back. During FY12, headline WPI rate of inflation moderated from a peak of 10% in September 2011 to 7.7% in March, 2012.

"The evolving growth-inflation dynamic will continue to influence the Reserve Bank's stance on interest rates. Both headline and retail inflation rates are rising, which have a bearing on inflation expectations. Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks," RBI said underscoring the need to resolve the supply bottlenecks to arrest the widening current account deficit.

The rate of lending rates, according to RBI, are still below the levels seen during the high growth phase of 2003-08.

India's GDP (gross domestic product) growth was a depressing 5.3% in Jan-March, quarter in FY12. However, for the full year it was at 6.5%.

"Deceleration in industrial production from the supply side and weak investment from the demand side have, in particular, contributed to the growth slowdown," RBI observed.

"Perhpas, the (latest) inflation figures might have weighed their (RBI's) decision. It is not necessary for the (RBI) governor to consult me," Pranab Mukherjee, the finance minister told reporters in New Delhi, while reacting to the RBI's policy actions.

saikat.das@network18online.com