India’s central bank halts rate hikes on lower inflation (Lead)

December 16th, 2011 - 3:22 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 - in a bid to spur growth, while also drawing some comfort from the easing of annual inflation.

“While inflation remains on its projected trajectory, the downside risks to growth have clearly increased,” the Reserve Bank of India (RBI) said in a statement, presenting the mid-quarter review of the monetary policy for the current fiscal.

“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.”

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 central bank also said that from this point onward, the effort would be to reverse the cycle, which effectively means industry can even hope for some easing of interest rates in the coming months.

Talking to reporters here, RBI Governor D.Subbarao, however, said he could not speculate when the central bank could start lowering rates.

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.

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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