RBI keeps key policy rates intact, cuts SLR | SupportBiz

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RBI keeps key policy rates intact, cuts SLR

The Reserve Bank of India (RBI) on July 31 kept key policy rates unchanged for the second time since June, saying that lowering them would raise inflationary pressure without necessarily stimulating growth. The central bank, however, in an unexpected move, cut the statutory liquidity ratio (SLR) by a percentage point to ease the flow of credit to industry.

In the first quarter review of monetary policy, the RBI kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8 percent. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also kept unchanged at seven percent.

The Cash Reserve Ratio (CRR), the amount of funds that the commercial banks have to keep with the RBI, stands steady at 4.75 percent.

However, the central bank cut the statutory liquidity ratio (SLR) by a percentage point to 23 percent to ease the flow of credit to industry. This move is expected to add INR60,000 crore liquidity in the markets.

These rates determine the lending and borrowing rates by the commercial banks to general public and corporates.

"In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," the RBI said in the review.

"The primary focus of monetary policy remains inflation control, in order to secure a sustainable growth path over the medium-term. While monetary actions over the past two years may have contributed to the growth slowdown - an unavoidable consequence - several other factors have played a significant role," Governor Duvvuri Subbarao said in the policy note.

Later, addressing a press conference, Subbarao said that inflation stickiness did not allow the central bank to cut the rates.

He, however, said that the RBI would be 'ready to act appropriately' if and when necessary.

Core inflation declined to a five-month low of 7.25 percent in June, as compared to 7.55 percent in the previous month. However, it remains much above the RBI's comfort level of 4-5 percent.

This is the second consecutive policy review when the RBI has left key policy rates unchanged. In the mid-quarter review announced on June 18, the RBI had left key policy rates unchanged after cutting the rates by 50 basis points in April.

The next mid-quarter review of monetary policy for 2012-13 will be announced on September 17, 2012.

Reacting on the RBI policy, Kaushik Basu, outgoing Chief Economic Advisor, said that the central bank's move was in a right direction.

The central bank said that macro-economic conditions have deteriorated since it announced the monetary policy statement in April, when it lowered the rates.

"Much of the global economy is in a synchronised slowdown, having lost the upward momentum seen in the early months of the year," the RBI said.

The RBI has lowered the growth projection for the current financial year to 6.5 percent, sharply down from 7.3 percent pegged in April.

The country's gross domestic product expanded by 5.3 percent in the quarter ended March, the weakest in nine years.