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RBI holds key rates, cuts growth forecast

RBI holds key rates, cuts growth forecast
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First Published: Tue, Jan 27 2009. 12 38 PM IST

Updated: Tue, Jan 27 2009. 12 38 PM IST
Mumbai: The Reserve Bank of India (RBI) left its short-term rates and banks’ cash reserve requirements unchanged on Tuesday as it waited to gauge the impact of its aggressive easing since mid-October to stem a sharp economic downturn.
Fiscal measures to shore up the economy against the global downturn would sharply widen the union government’s fiscal deficit, the central bank said in its quarterly policy review.
It also cut its forecast for economic growth in the current fiscal year to 7.0% “with a downward bias” from an estimate of 7.5-8.0% in October, bringing it broadly in line with recent government and market predictions.
Wholesale price inflation was projected to fall below 3% in annual terms by the end of the fiscal year in March.
“There is now distinct evidence of further slowdown as a consequence of the global downturn,” the central bank said.
Also Read Full Text | RBI’s Q3 2008-09 Monetary Policy Review (PDF)
The central bank left its lending rate steady at 5.5% and its reverse repo rate, at which it absorbs surplus cash from the banking system, unchanged at 4.0%. It has also kept the cash reserve ratio , the amount of funds banks have to keep on deposit with it, unchanged at 5.0%.
“The response to the Reserve Bank’s policy actions over the last several months is still unfolding,” the central bank said.
The central bank said the federal budget would be under pressure from several factors. Slowing growth would lower tax collections while stimulus measures, subsidies, a pay rise for civil servants and a farm debt waiver had added to spending.
“Additional expenditure coupled with foregone revenue would raise the fiscal deficit from the budget estimate of 2.5% to at least 5.9% of GDP,” the central bank said.
Earlier this month, it slashed its short-term rates by 1 percentage point and cut the cash reserve requirement by half a point as Asia’s third largest economy struggled to weather the onslaught of the global slowdown.
There are signs of faltering demand in the economy, which grew by 9% or more over the last three fiscal years, as high borrowing costs at home and recessions in key markets have spoiled appetite for goods and services.
Prime Minister Manmohan Singh’s Economic Advisory Council said last week said expansion would slow to 7.1% for the current fiscal year to end March, from a previous estimate of 7.7%.
Many private sector economists are more pessimistic. In a quarterly poll carried out by Reuters in December, economists expected economic growth to ease to 6.8% in 2008-09, its slowest pace in six years.
The bank rate, used by banks to price long-term loans, remained at 6.0%.
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First Published: Tue, Jan 27 2009. 12 38 PM IST
More Topics: RBI | CRR | Repo rate | Reverse repo rate | GDP |