Mumbai: Reserve Bank Tuesday left key interest rates unchanged on fears of monsoon shortfall aggravating inflation, leaving industry and retail borrowers disappointed.
In its quarterly monetary policy review, the Reserve Bank of India (RBI) lowered the economic growth projection for the current fiscal to 6.5 percent from its earlier estimate of 7.3 percent, stating rising government expenditure poses risks to economic stability.
Its inflation forecast for the fiscal ending March, 2013 has also been raised to 7 percent from earlier projection of 6.5 percent.
"In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," RBI Governor D Subbarao said.
As a liquidity inducing-measure, RBI reduced the Statutory Liquidity Ratio (SLR) -- the amount of deposits banks park in government bonds -- by 1 percent to 23 percent, effective August 11.
The interest rates have been left unchanged for second consecutive review of the monetary policy.
The key lending (repo) rate, at which banks borrow from RBI, has been retained at 8 percent and the cash reserve ratio (CRR) -- the amount of deposits banks keep with RBI in cash -- at 4.75 percent.
"The primary focus of policy remains inflation control in order to secure a sustainable growth path over the medium-term ...Lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," he said.
According to industry body CII the RBI decision tantamounts to a "missed opportunity to revive growth."
Terming the policy decision is on expected line, bankers said there is hardly any scope for cutting deposit and lending rate in view of inflation.
After initial reactions, the stock markets shrugged off the status quo on policy and tracked global cues to close 92 points higher for the day.
Asked if he sees possibility of the rate cut during the year, Subbarao said "I see a scope, but I cannot say when. I cannot even say when it might happen."
Commenting on the policy review, Prime Minister's Economic Advisory Council Chairman C Rangarajan termed the decision as right move saying rate cut would have given wrong signal at this point of time.
"The efforts of RBI were best to contain inflation. RBI has struck an appropriate balance to control inflation and to provide stimulus to growth. Repo rate cut would have sent a wrong signal since inflation is high," Rangarajan said.
"A cut in statutory liquidity ratio (SLR) will inject liquidity into the system and it will also prevent crowding out of large government borrowing," he added.
After getting signals from the central bank, bankers hinted at a marginal reduction in lending rates following the SLR reduction.
The nation's largest lender State Bank of India hinted at lowering lending rates to retail customers.
"The one percentage point reduction in the SLR will release an additional Rs 10,000 crore for SBI. That coupled with Rs 6,500 crore released through the reduction in export refinance, may lead the bank to cut lending rates in retail," SBI Chairman Pratip Chaudhuri told reporters at the customary post-policy press briefing at the RBI headquarters.
It is always better to deploy money at 10.50 percent return than the average of 7.5 percent which the SLR gives, Chaudhuri said.
Saddled with high inflation, RBI had refrained itself from lowering rate in its last policy review on June 18 despite moderation in economic activity and the growth rate falling to 9-year low of 6.5 percent in 2011-12. RBI advised the government to take immediate steps to control fertiliser and fuel subsidies and keep them under 2 percent of GDP.
The central bank said it will continue with open market operations to ensure adequate liquidity. It had injected Rs 86,000 crore in the financial system during the first quarter.
With regard to global economic impact on domestic economy, Subbarao said external risks to the outlook for the Indian economy are intensifying.
"Adverse feedback loops between sovereign and financial market stress in the euro area are resulting in increased risk aversion, financial market volatility, and perverse movements in capital flows," he said.
With the deteriorating macroeconomic situation in the euro area interacting with a loss of growth momentum in the US and in emerging and developing economies, the risk of potentially large negative spillovers has increased, he said, adding, India's growth prospects too will be hurt by this.
However, he said, the Reserve Bank stands ready to respond to external shocks that may arise from the turbulent global environment.
RBI flagged external risks emanating from "fiscal cliff" in the US, uncertainties on commodity prices, and the "twin deficits" as risks to the monetary policy.
"Failure to narrow the twin deficits (current account deficit and fiscal deficit) with appropriate policy actions threatens both macroeconomic stability and growth sustainability," RBI said, adding that financing of fiscal deficit through domestic savings will crowd out private investment, harming growth.
CAD for FY2011-12 was at a 30-year-high of 4.2 percent of GDP, up from 2.7 percent in 2010-11. The government has also been unable to rein in the fiscal deficit at the budgeted levels. It shot up to 5.9
percent last fiscal as against the budgetary target of 4.6 percent.
First Published: Tuesday, July 31, 2012, 08:42