Mumbai: The Reserve Bank on Monday kept interest rates unchanged giving priority to checking inflation over growth, disappointing India Inc and retail borrowers who were expecting at least 0.25 percent rate cut.
RBI also rejected the widespread demand for reduction in Cash Reserve Ratio (CRR) to pump in more money into the banking system.
Unveiling the mid-quarter monetary policy review, RBI said, "reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressure".
While the short term lending rate (repo) has been kept unchanged at 8 percent, the CRR, portion of deposits banks are required to park with the RBI, will be 4.75 percent.
The wholesale inflation was 7.55 percent in May. At the retail level, the Consumer Price Index (CPI) inflation for May was 10.36 percent.
RBI's action, according to Finance Minister Pranab Mukherjee, was influenced by the current price situation.
"(High inflation)...Might have weighed their (RBI's) decision making process...Normally in mid-quarter review, it is not necessary for the Governor to consult the Minister," he said in New Delhi after the policy announcement.
Mukherjee had said on Saturday that he was expecting the RBI to "adjust" the monetary policy to fuel growth.
Stock markets, which opened with gains in the morning on rate cut hopes and on positive developments in Greece, reacted negatively. The BSE Sensex fell sharply by over 200 points after the policy announcement.
Assocham President Rajkumar Dhoot said, "We are disappointed that RBI ignored all expectations, including observations of the Finance Minister about the need for a rate cut."
RBI said management of liquidity is a key concern and it will continue buy government bonds.
On the rupee fall, it said this should make the country's exports competitive overtime and act as a demand stimulus.
The political inability to pass on elevated crude prices to consumers is resulting in a widening of the current account deficit, and will end up crowding out investment at a time when encouraging investment is imperative from the growth perspective, RBI said.
On the troublesome economic situation globally, it said the evolution of the euro-zone crisis which has a bearing on the capital inflows, will be a factor to look out for.
Between March 2010 and October 2011, RBI had cut repo rates a record 13 times, by 350 basis points, in its battle against inflation.
After a gap of three years, on April 17, 2012, RBI had slashed short term lending rate by 0.50 percent to 8 percent. It had indicated in the last policy action in April that its space to cut rates further was difficult.
First Published: Monday, June 18, 2012, 09:10