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Updated: June 17, 2013 22:46 IST

Reserve Bank leaves rates unchanged, warns of inflation risk

Special Correspondent
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The RBI said that CAD continued to be a concern.
The RBI said that CAD continued to be a concern.

The Reserve Bank of India (RBI), on Monday, kept its policy rates unchanged.

The central bank decided to keep the cash reserve ratio (CRR) unchanged at four per cent. CRR is the portion of the total deposits that banks must keep with the central bank.

The repo rate, the rate at which banks borrow funds from the central bank- too is unchanged at 7.25 per cent.

The RBI had cut the CRR in the last one-and-a-half years by 200 basis points from a peak of 6 per cent, and it had cut the repo rate by 125 basis points till May 3, from a high of 8.50 per cent, in the last one year.

After cutting the repo rate by 50 basis points in April 2012, the central bank cut it by 25 basis points each since last January.

Even though wholesale inflation had moderated, “upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects,” said the RBI in its first mid-quarter policy review.

Last week, the rupee touched its historic low of 58.98 a dollar, and it was the hardest hit currency among the emerging markets, which witnessed a sudden sell-off.

The rupee depreciated by 5.8 per cent against the dollar during the current financial year up to June 14. It fell by 6.6 per cent during May 22-June 11 due to sell-off by foreign institutional investors (FIIs).

As recent experience had shown, “shifts in global market sentiment can trigger sudden stop and reversal of capital from a broad swath of emerging economies, swiftly amplifying risks to the outlook. India is not an exception,” the apex bank said

On the domestic front, the central bank said the macro-economic conditions remained weak, hamstrung by infrastructure bottlenecks, supply constraints, lacklustre domestic demand and subdued investment sentiment.

Though the wholesale price index (WPI)-based inflation eased for three months in succession with the May reading at 4.7 per cent, down from an average of 7.4 per cent in 2012-13, the RBI said “elevated food inflation, particularly in respect of cereals and vegetables, sustained upside pressures on overall inflation.”

The Reserve Bank’s monetary policy stance would be determined by how growth and inflation trajectories and the balance of payments situation evolved in the months ahead, it said.

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” said the RBI. “While several measures have been taken to contain the current account deficit (CAD), we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions, and its impact on capital flows,” it added.

The inflation outlook, going forward, would be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices (MSP) as well as the recent depreciation of the rupee.

The RBI said that CAD continued to be a concern. Softer global commodity prices and recent measures to dampen gold imports were expected to moderate the CAD in 2013-14 from its level last year. “The main challenge is to reduce the CAD to a sustainable level; the near-term challenge is to finance it through stable flows,” it said.

The most recent number on the Centre’s fiscal deficit, at 4.9 per cent of gross domestic product (GDP) for 2012-13, had turned out better than expected and instilled confidence in the government’s commitment to contain the fiscal deficit for 2013-14 at 4.8 per cent. “Perseverance with this consolidation should help in mitigating the twin deficit risks to the outlook,” the RBI noted

The apex bank said that key to reinvigorating growth was accelerating investment by creating a conducive environment for private investment, improving project clearance and implementation and leveraging on the crowding-in role of public investment.

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