Fearing scanty rains stoking inflation, the Reserve Bank of India (RBI), on Tuesday, left key policy rates and cash reserve ratio (CRR) unchanged for the second time since June, leaving industry and retail borrowers disappointed.
Saying lowering the policy rates would raise the inflationary pressure, RBI Governor D Subbarao said, “in current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth.”
The RBI’s primary focus remains inflation control, he said.
As such, the repo rate — at which RBI lends money to scheduled banks — stays unchanged at 8 per cent and the CRR — the share of deposits banks must keep with RBI — remains the same at 4.75 per cent.
However, in a move to free up liquidity in the system, RBI only reduced the statutory liquidity ratio (SLR) by one per cent or 100 basis points (bps) to 23 per cent, effective August 11, 2012. SLR is the percentage of liquid assets that banks must maintain in the form of cash, gold and un-encumbered approved securities.
“The primary focus of policy remains inflation control in order to secure a sustainable growth path over the medium-term ...lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” Subbarao said.
Missed opportunity
While corporate India stated that RBI’s decision tatamounts to a “missed opportunity to revive growth,” the bankers, on the other hand, noted that there was hardly any scope for cutting deposit and lending rate in view of inflation.
Indian Banks’ Association(IBA) said the SLR cut will release as much as Rs 66,000 crore in the system and will lead to increased lending.
Saddled with high inflation, RBI had refrained itself from lowering rate in its last policy review on June 18 despite moderation in economic activity and the growth rate falling to 9-year low of 6.5 per cent in 2011-12.
Explaining the rationale of the monetary policy stance, Subbarao said inflation continues to be a worry with the headline wholesale price index inflation remained above 7 per cent in June, while India’s consumer price index was 10 per cent. Growth in India slowed to a nine year low of 5.3 per cent in the March quarter.
The RBI also cut its economic growth outlook for fiscal year 2013 to 6.5 per cent, from the 7.3 per cent assumption made in April, putting its outlook closer to that of many private economists. It also raised its headline inflation projection for March 2013 to 7 per cent from 6.5 per cent in its April review.
“Headline inflation has persisted even as demand has moderated and the pricing power of corporates weakened,” Subbarao said.
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