MUMBAI: Concerned over economic slowdown, the Reserve Bank today kept interest rates unchanged and indicated that it could cut key policy rates from now onwards to arrest falling growth while keeping a close vigil on inflation.
"While inflation remains on its projected trajectory, downside risks to growth have clearly increased... Further rates hike may not be warranted," the Reserve Bank of India (RBI) said in it its mid-quarter review of monetary policy.
The economic growth has come down to 6.9 per cent in the second quarter of the current fiscal from 8.1 per cent in the corresponding quarter in the previous financial year even as inflation remains close to the double-digit mark. The industrial growth registering a negative growth of 5.1 per cent in October too may have prompted RBI to maintain the status quo.
The central bank maintained repo (rate at which banks borrow from RBI) at 8.5 per cent, reverse repo (rate at which the RBI borrows from banks) at 7.5 per cent.
The halt in rate increase comes after 13 hikes since March 2010.
The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at six per cent. The industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.
"I cannot really speculate on when we might start cutting rates, but certainly that is an event, that an action that is on the way forward...," RBI Governor D Subbarao said on the sidelines of an event.
The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.
Immediate action was required by the Reserve Bank of India in this policy review as India's growth rate has already plummeted to sub 7% levels. If RBI had not halted the rate hike regime, experts feel the growth rate would have slipped to even lower levels.
The government's focus needs to shift back to growth concerns in view of weakening growth and market sentiments, finance minister Pranab Mukherjee said on Thursday.
"The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift some of our focus back to near term issues," he said during the Delhi economics conclave on Thursday.
Commenting on the RBI's move to keep policy rates unchanged, C Rangarajan, Chairman of PMEAC said that the pause in the rate hike was an appropriate thing to do and that headline inflation would come down in the future.
It is necessary in this context for policymakers to send clear signals, mindful of the fact that our options today are much more limited. "India cannot afford to relax on its efforts to promote growth," Mukherjee said.
Last month, data released by government indicated India's economy grew at its slowest pace in more than two years in the July-September quarter to 6.9%.
Economists said they were reviewing their GDP growth estimates for the current fiscal and expected growth to moderate further against the backdrop of a slowing global economy and policy delays.
"Growth in India, Asia's third-largest economy, is expected to accelerate mildly to 7.4% in the fiscal year starting April 1, 2012, from 7.0% in the current financial year," according to a report by Standard Chartered.
Earlier, ratings agency Fitch revised its growth projection for the Indian economy in 2011-12 downward to 7 per cent from the earlier estimate of 7.5 per cent on account of sustained inflation, global slowdown and high domestic interest rates.
Inflation overhang:
Food inflation dropped to its lowest in nearly four years as prices of vegetables, fruit and pulses softened further, providing some relief to a beleaguered government, but economists warned against premature celebrations, warning food inflation may rise again after winter.
Food inflation touched 4.35% for the week ending December 3 against 6.6% the previous week, data released showed. "We have just got news today that it is below 5 per cent. Over the last year and half, there have been a slew of measures... we were expecting by November-December to see full impact of these policies. We do expect this problem to ease off," said chief economic advisor Kaushik Basu. Basu expects food inflation to drop below 3% by the first week of January, which will help drive down headline inflation.
(Source- http://economictimes.indiatimes.com)
"While inflation remains on its projected trajectory, downside risks to growth have clearly increased... Further rates hike may not be warranted," the Reserve Bank of India (RBI) said in it its mid-quarter review of monetary policy.
The economic growth has come down to 6.9 per cent in the second quarter of the current fiscal from 8.1 per cent in the corresponding quarter in the previous financial year even as inflation remains close to the double-digit mark. The industrial growth registering a negative growth of 5.1 per cent in October too may have prompted RBI to maintain the status quo.
The central bank maintained repo (rate at which banks borrow from RBI) at 8.5 per cent, reverse repo (rate at which the RBI borrows from banks) at 7.5 per cent.
The halt in rate increase comes after 13 hikes since March 2010.
The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at six per cent. The industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.
"I cannot really speculate on when we might start cutting rates, but certainly that is an event, that an action that is on the way forward...," RBI Governor D Subbarao said on the sidelines of an event.
The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.
Immediate action was required by the Reserve Bank of India in this policy review as India's growth rate has already plummeted to sub 7% levels. If RBI had not halted the rate hike regime, experts feel the growth rate would have slipped to even lower levels.
The government's focus needs to shift back to growth concerns in view of weakening growth and market sentiments, finance minister Pranab Mukherjee said on Thursday.
"The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift some of our focus back to near term issues," he said during the Delhi economics conclave on Thursday.
Commenting on the RBI's move to keep policy rates unchanged, C Rangarajan, Chairman of PMEAC said that the pause in the rate hike was an appropriate thing to do and that headline inflation would come down in the future.
It is necessary in this context for policymakers to send clear signals, mindful of the fact that our options today are much more limited. "India cannot afford to relax on its efforts to promote growth," Mukherjee said.
Last month, data released by government indicated India's economy grew at its slowest pace in more than two years in the July-September quarter to 6.9%.
Economists said they were reviewing their GDP growth estimates for the current fiscal and expected growth to moderate further against the backdrop of a slowing global economy and policy delays.
"Growth in India, Asia's third-largest economy, is expected to accelerate mildly to 7.4% in the fiscal year starting April 1, 2012, from 7.0% in the current financial year," according to a report by Standard Chartered.
Earlier, ratings agency Fitch revised its growth projection for the Indian economy in 2011-12 downward to 7 per cent from the earlier estimate of 7.5 per cent on account of sustained inflation, global slowdown and high domestic interest rates.
Inflation overhang:
Food inflation dropped to its lowest in nearly four years as prices of vegetables, fruit and pulses softened further, providing some relief to a beleaguered government, but economists warned against premature celebrations, warning food inflation may rise again after winter.
Food inflation touched 4.35% for the week ending December 3 against 6.6% the previous week, data released showed. "We have just got news today that it is below 5 per cent. Over the last year and half, there have been a slew of measures... we were expecting by November-December to see full impact of these policies. We do expect this problem to ease off," said chief economic advisor Kaushik Basu. Basu expects food inflation to drop below 3% by the first week of January, which will help drive down headline inflation.
(Source- http://economictimes.indiatimes.com)
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