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RBI leaves rates unchanged; cuts banks' cash reserve ratio

Source : AGENCIES
Last Updated: Mon, Sep 17, 2012 08:31 hrs
Police officer stands guard in front of the RBI head office in Mumbai

The Reserve Bank of India (RBI) on Monday left interest rates unchanged but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a series of reforms to boost growth and improve its fiscal position.

The ​Reserve Bank of India (RBI) has left the repo rate (the rate at which it lends to banks) unchanged at 8%.

The reverse repo rate (the rate at which RBI borrows from banks) has also been left untouched at 7%.

It, though, cut banks' cash reserve ratio (percentage of depositors' balances that banks must hold as cash) by 25 basis points (0.25%) to 4.5%,  effective from the fortnight beginning September 22.

The RBI decision will release Rs 17000 crore of primary liquidity into the system.

"I suspect the RBI still wants to see inflation pressures move lower before easing policy further. (There) is also the risk that the recent round of government reforms could come unstuck if opposition in India is strong enough," said Jonathan Cavenagh, currency strategist at Westpac in Singapore, adding that he thought a rollback of those moves is unlikely.

The rupee and bond prices weakened immediately after the RBI decision, with the yield on the 10-year bond rising 5 basis points from before the RBI statement to 8.17 percent. The one-year swap rate rose 8 basis points (0.08%) to 7.68% from before the release.

The Sensex also trimmed gains.

"The government's recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI)," the RBI wrote in its policy statement.

"However, in the current situation, persistent inflationary pressures alongside risks emerging from twin deficits - current account deficit and fiscal deficit - constrain a stronger response of monetary policy to growth risks," the RBI said.

Finance minister P Chidambaram, in his reaction to the measures, said, "I am very confident that between now and October 30, since the government is expected to take a number of additional policy measures and also lay out the path of fiscal correction, the response of RBI on October 30 will be far more supportive of growth."

The RBI has held borrowing costs steady since a deeper-than-expected 50 basis point (0.5%) cut in April, and has repeatedly called on the government to do its part by improving its fiscal position.

Thursday's diesel price hike had initially prompted market experts to speculate that the RBI may lower interest rates on Monday, but a spike in August inflation data on Friday from July's near three-year low put a damper on such expectations.

The wholesale price index rose a higher-than-expected 7.55% in August from a year earlier, mainly driven by higher food prices.

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