The Reserve Bank of India (RBI), has kept policy rates unchanged in its Mid Quarter Review of Monetary Policy announced today. The repo rate (the rate at which RBI lends money to banks) remains unchanged at 8.5%. The Reverse Repo Rate (rate at which RBI borrows money from banks) also will remain unchanged at 7.5% and the Marginal Standing Facility (MSF) rate at 9.5%.
The RBI has also kept the Cash Reserve Ratio (the amount of funds that the banks have to keep with RBI) unchanged at 6%.
RBI indicated that that it could cut key policy rates from now onwards to arrest falling growth while keeping a close vigil on inflation. According to the mid quarterly review of RBI, the global growth for 2011 – 2012 is now expected to be lower than earlier projected.
Expressing concerns over the moderating growth rate, the RBI has stated that based on the projected inflation trajectory, further rate hikes may not be warranted. GDP Growth of the domestic economy has moderated to 6.9% in the second quarter of 2011 – 2012 from 7.7% in the first quarter. The deceleration in economic activity in the second quarter of this financial year has been on account of a sharp moderation in industrial growth.
The review stated that promising agricultural prospects on the back of Kharif output and progress on rabi sowing has been a significant contributing factor towards declining inflation rates.
On account of moderation in food inflation in November – 2011 and expected moderation in aggregate demand, the inflation projection for March 2012 is retained at 7%. The mid quarterly review of the RBI also highlighted that inflation risks still remain high and both inflation and inflation expectations still remain above the comfort level of the Reserve Bank.
The growth deceleration continues to contribute to a decline in inflation momentum which is also being helped by softening food inflation.
The Reserve Bank is expected to make a formal numerical assessment of its growth and inflation projections the year 2011 – 2012 in its Third Quarter Review in January 2012.
The Finance Minister Mr. Pranab Mukherjee has said that the RBI Mid-Quarter Review of Monetary Policy will help in arresting the sharp depreciation of Indian rupee against the US dollar.
Talking to reporters outside Parliament, he said speculative interventions in the foreign exchange market are among the factors that contributed to its slide. He expressed hope that inflation will moderate further in the coming weeks but called for improving business sentiments and recovery of growth momentum in the remaining months of current fiscal.
Mr. Mukherjee pointed out that food inflation has declined but inflation in manufactured goods remains around 7.7 per cent. The Minister said that the apex bank has chosen to reflect its concerns on growth which has faltered in past few months.
The Governor of the Reserve Bank of India (RBI), D. Subbarao, today said in Mumbai that the RBI will manage liquidity through open market operations. While elaborating on RBI’s mid quarterly monetary policy review, Subbarao said a depreciating rupee will put pressure on inflation and it is not possible to speculate when the RBI will start cutting rates. He said further measures by the RBI will depend on growth and inflation numbers.
Prime Minister’s Economic Advisory Council, PMEAC Chairman C Rangarajan today said RBI’s move to keep all the key policy rates unchanged in its mid-quarterly policy review is on expected lines and the central bank might start revising downwards its monetary stance only if inflation continues to decline further.
He added that inflation will start declining particularly food prices will come down more sharply as it was earlier indicated, in December and in January as well. He said, the impact of the base effect will be seen as food prices generally come down in winter season.
He said he believes inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action.
