India’s central bank keeps key lending rates unchanged (Second Lead)

June 18th, 2012 - 1:23 pm ICT by IANS  

Mumbai, June 18 (IANS) The Reserve Bank of India (RBI) Monday kept key lending rates unchanged. The re-purchase rate remains unchanged at eight percent, which automatically keeps the reverse re-purchase rate at seven percent.

The re-purchase rate is the interest the central bank levies on short-term borrowings by commercial banks. The reverse re-purchase rate is the interest on short-term lending.

A cut in these rates rate would have reduced the cost of accessing funds for lending institutions. It would have also eased money supply in the financial system by making it more attractive for commercial banks not to park their funds with the RBI in the form of government securities, and instead lend it for commercial purposes.

The apex bank said that since the last rate cut, global macroeconomic indicators have deteriorated and that the headline inflation numbers are far above the comfort range.

“Since the RBI’s annual policy statement in April, global macroeconomic and financial conditions have deteriorated. At the same time, the domestic macroeconomic situation too raises several deepening concerns,” the apex bank said in a statement.

In April, Governor Duvvuri Subbarao had cut re-purchase rate by 50 basis points to 8 percent, which automatically impacted the reverse re-purchase rate which dropped to 7 percent from 7.5 percent.

By not cutting rates, the apex bank has shown resistance to the pressure that was being built on it to cut rates. The pressure was being emanated out of recent data which had shown that the economy is facing low growth.

However, the RBI cited that inflation continues to remain very high and much above the comfort level.

“While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend,” the apex bank said.

Food inflation re-entered the double-digit zone after a gap of six months in April 2012 and the trend continued in May.

Food inflation rose to 10.74 percent in May as compared to 8.25 percent in the previous month as vegetables, pulses, milk, egg, meat and fish became costlier, pinching the pockets of common people.

The overall inflation moved up to 7.55 percent in May as compared to 7.23 percent in the previous month.

To tackle inflation, the central bank raised its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April.

On the global front, the apex bank said that euro area sovereign debt problem has continued to weigh on the global recovery. After a brief phase of relative calm reflecting the large liquidity injection by the European Central Bank (ECB), renewed concerns have arisen about a sustainable solution to the crisis.

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