With inflation easing, India’s central bank halts rate hikes (Roundup)

December 16th, 2011 - 7:32 pm ICT by IANS  

Pranab Mukherjee Mumbai, Dec 16 (IANS) India’s central bank Friday kept key interest rates unchanged after as many as 13 successive hikes since early 2010, shifting its stance from taming inflation to spurring growth.

“We have taken into account the inflation situation and also growth moderation. For the moment, we have kept the policy rates steady. However, we will manage liquidity through market operations but I cannot speculate when we might start cutting rates,” Reserve Bank of India Governor D. Subbarao said after the bank presented its mid-quarter review of monetary policy.

The RBI’s change in focus came in the wake of inflation slowing to a one-year low and industrial output falling for the first time in 28 months.

“The guidance given in the second quarter was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated,” said the RBI in its review.

“While inflation remains on its projected trajectory, the downside risks to growth have clearly increased.”

So the repurchase rate, or the interest the Reserve Bank levies on short-term borrowing by commercial banks, is unchanged at 8.5 percent, while the reverse repurchase rate, or interest the RBI pays to banks on short-term lending, stands at 7.5 percent.

The apex bank also maintained status quo on the cash reserve ratio at 6 percent, which refers to the cash that banks have to maintain with the central bank, which uses it to manage liquidity in the system.

The RBI also said that from this point onward, the effort would be to reverse the cycle, effectively meaning the industry can hope for some easing of interest rates in the coming months.

Finance Minister Pranab Mukherjee welcomed the RBI’s decision to keep rates unchanged and said it signified the governor’s concern on slowing growth.

“The need to improve the business sentiments and recover the growth momentum in the remaining months of the current fiscal necessitated a review of the current monetary policy stance,” Mukherjee told reporters in Delhi.

India Inc too heaved a sigh of relief over the apex bank’s decision to not initiate another hike. However, some felt the RBI should have started easing rates in this review itself as growth had slumped.

“RBI’s guidance that monetary policy actions from now on will respond to the slowdown in growth is reassuring. However, the policy does not reflect the urgency of the situation where industrial growth is contracting and the investment outlook is subdued,”said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

The review came against the backdrop of India’s annual rate of inflation falling to 9.1 percent in November, while the food inflation fell to 4.35 percent for the week ended Dec 3.

But factory output also declined sharply to minus-5.1 percent in October, while the gross domestic product saw a mere 6.9 percent growth during the second quarter of this fiscal, which was the lowest in over two years.

The Reserve Bank said it maintained its projection for annual inflation at 7 percent for end-March, while reserving its forecast on growth for the third quarter review, which is expected in January.

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