RBI keeps interest rates unchanged, signals downward trend

With inflation remaining high, the Reserve Bank on Thursday kept the interest rate unchanged for now, but made a promise that cost of borrowing will come down in future.

Amidst expectations of a pause in tight monetary policy, RBI Governor D Subbarao gave a firm signal that no further hardening of interest rates is required.

However, the timing and the quantum of rate cuts will be determined by inflation, he said unveiling the mid-quarterly review of the credit policy, a day before the Union Budget.

The benchmark policy interest rate (repo rate) at which RBI lends to banks has been kept unchanged at 8.5 percent.

The cash reserve ratio, the portion of deposits banks need to keep with RBI, has been retained at 4.75 percent.

But this rate was reduced only on 10^th March by 0.75 percentage points to infuse Rs 48,000 crore in the system to ease liquidity.

"Recent growth-inflation dynamics have prompted the RBI to indicate that no further tightening is required and that future actions will be towards lowering the rate.

"However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions," Subbarao said, adding that suppressed prices of fuel, fertiliser and power pose risk to inflation in the economy.

The RBI said the upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippages in government finances and rupee's appreciation.

Inflation rose to 6.95 percent in February which is much above the Reserve Bank's comfort level of 5-6 percent.

RBI said while there is a slowdown in economy, the GDP growth in the last quarter of the current financial year is expected to be better than the previous three-month period.

The RBI policy, along with political uncertainty, dampened investor sentiment with BSE benchmark Sensex plunging over 240 points at mid-day.

Prime Minister's economic advisory panel Chairman C Rangarajan said RBI will watch the inflation trajectory and the policy change will come only when there is a definite signal of decline in price rise.

India Inc said RBI should reduce interest rates in the next policy to spur economic activity.

"It is difficult for RBI to cut down rates, but industry would need to have a rate cut for investment pipeline. We should be strongly expecting a cut in the next review," CII Director General Chandrajit Banerjee said on Thursday.

RBI's decision to keep policy rate unchanged is driven by the better than anticipated spike in growth numbers as well the rising inflation pressure on the economy.

RBI is scheduled to announce annual credit policy for 2012-13 on 17^th April.

Many analysts had expected the Governor not to take any major step in the Budget-eve policy announcement.

Reiterating its concerns on the fiscal situation, which saw sharp increase in government borrowing, the central bank said "credible fiscal consolidation will be an important factor in shaping inflation outlook" which has key determinant of policy actions in the past two years.

The Reserve Bank had been aggressively hiking policy rates to tame inflation. The apex bank hiked key policy rates 13 times, totalling 3.50 percent between March 2010 and October 2011.

On systemic liquidity, which prompted the CRR cut, RBI said it will worsen further till 16^th March with the outgo of advance tax payments by corporates.