The Reserve Bank of India (RBI) on Monday left its repurchase rate (repo rate) and the cash reserve ratio (CRR) unchanged, belying markets' expectations of a fresh policy easing by the central bank in order to lift GDP growth.
The markets reacted negatively to the RBI's policy announcement. The stocks erased early gains to turn lower while the benchmark 10-year Government bonds too declined from day's high. The rupee also lost ground versus the US dollar.
On the basis of an assessment of the current macroeconomic situation, the RBI has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%. The CRR of scheduled banks has been left unchanged at 4.75% of their net demand and time liabilities.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7%, and the marginal standing facility (MSF) rate and the Bank Rate at 9%.
The RBI said that it had front-loaded the policy rate reduction in April with a cut of 50 basis points in the repo rate.
This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives, the RBI said.
"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small," the RBI said in a statement.
Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures, the RBI said.
Since the Annual Policy statement in April, global macroeconomic and financial conditions have deteriorated, the RBI said today.
At the same time, the domestic macroeconomic situation too raises several deepening concerns, it added.
While GDP growth in FY12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend, the RBI said.
Management of liquidity remains a priority, the RBI said.
Even as the liquidity situation converges to the comfort zone, the RBI said that it will continue to use Open Market Operations (OMOs) as and when warranted to contain liquidity pressures.
The evolving growth-inflation dynamics will continue to influence the RBI's stance on interest rates, the central bank said today.
Core inflation has moderated, reflecting demand conditions and lower pricing power, the RBI observed.
However, both headline and retail inflation rates are rising, which have a bearing on inflation expectations, it said.
Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks, the RBI said.
Finally, recognising that the global situation is turbulent, the RBI said it stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.
Markets at 10:52 am (IST)
Sensex- 17,095; Nifty - 5183.
Bank Nifty - 10,186.
8.15% 2022 yield: 8.0461%; Price: Rs 100.70.
Markets at 11:18 am (IST)
Sensex- 16,822; Nifty - 5,098.
Bank Nifty - 9,846.
8.15% 2022 yield: 8.1421%; Price: Rs 100.05.
Markets at 05:06 pm (IST)
Sensex- 16,705; Nifty - 5,064.
Bank Nifty - 9,749.
8.15% 2022 yield: 8.1673%; Rs 99.88.
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