RBI keeps key interest rates unchanged

The RBI decision to keep the rates unchanged also boosted the stock markets.

Reserve Bank of India Governor Duvvuri Subbarao however refused to comment on any future possibility of cutting the rates.

The RBI tightening cycle that has seen it lift policy rates 13 times since March 2010

The RBI said in view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated.

"From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth," it said.

"However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces.

"Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead," the RBI said.

Industry body ASSOCHAM hailed the RBI step as a very bold and appreciative decision.

"The unchanged Key policy rates and unchanged CRR is an indicator of the softening monetary policy instance. The slowdown in industrial growth and its impact on employment are of particular concern," said Dilip Modi, president of The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

"The rupee has plunged to a record low which will add price pressures. The government needs to take new policy initiatives to revive slowing growth and control inflation as fiscal and monetary options are limited," he said.

The industry can expect a possible rate cut in the days to come, he said.


The RBI said the GDP growth moderated to 6.9 per cent in Q2 of 2011-12 from 7.7 per cent in Q1 and 8.8 per cent in the corresponding quarter a year ago.

The deceleration in economic activity in Q2 was mainly on account of a sharp moderation in industrial growth, it said.

"On the expenditure side, investment showed a significant slowdown. Overall, during the first half (April-September) of 2011-12, GDP growth slowed down to 7.3 per cent from 8.6 per cent last year," said the RBI.

According to RBI, industrial performance has further deteriorated as reflected in the decline of the index of industrial production (IIP) by 5.1 per cent, y-o-y, in Oct 2011.

"This was mainly due to contraction in manufacturing and mining activities. The contraction was particularly sharp in capital goods with a y-o-y decline of 25.5 per cent, reinforcing the investment decline story emerging from the GDP numbers.

Other indicators also suggest a similar tendency, though by no means as dramatic as the IIP.

"The HSBC purchasing managers´ index (PMI) for manufacturing suggested further moderation in growth in November 2011. However, PMI-services index recovered in November from contractionary levels in the preceding two months.

"Corporate margins in Q2 of 2011-12 moderated significantly as compared with their levels in Q1. The decline in margins was largely on account of higher input and interest costs. Pricing power is evidently declining," said the RBI.

According to the central bank, since the Reserve Bank's Second Quarter Review (SQR) of October 25, 2011, the global economic outlook has worsened significantly.

"The recent European Union (EU) summit agreement did not assuage negative market sentiments, thereby increasing the likelihood of persistent financial turbulence as well as a recession in Europe.

"Both factors pose threats to emerging market economies (EMEs), including India. Significantly, despite these developments, crude oil prices remain elevated."