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RBI leaves key rates unchanged, CRR unchanged

RBI leaves key rates unchanged, CRR unchanged
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First Published: Fri, Dec 16 2011. 12 24 PM IST

Updated: Fri, Dec 16 2011. 12 24 PM IST
Mumbai: As expected, the Reserve Bank of India (RBI) left its key lending and borrowing rates unchanged on Friday, but indicated that it is getting increasingly worried about the growth prospects of the Indian economy.
The Indian central bank also left the cash reserve ratio, or the proportion of deposits that commercial banks have to mandatorily park with RBI, unchanged at 6%. There had been some speculation in the run-up to the policy that the bank may cut CRR to ease liquidity pressures in the money market.
The repo rate, or the rate at which RBI lends short term funds to banks, currently stands at 8.5% and the reverse repo, or the rate at which it sucks out excess money from the system, is 7.5%.
Announcing its mid-quarter review of monetary policy, the RBI said, “downside risks to the growth have clearly increased”.
“In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” the RBI said.
The RBI has hiked its key interest rates 13 times since March 2010 to fight inflation but the successive rate hikes have hurt corporations and individuals as banks have passed on the increased burden to borrowers.
Since March 2010, RBI has raised reverse repo rate by 425 bps points and repo rate by 350 bps to control inflation. One basis point is one hundredth of a percentage point.
Inflation has remained as major concern for the central bank in the last one year. Since December 2010, for 11 consecutive months, wholesale price inflation has remained between 9.45% and 9.78%, way above the comfort level of the central bank. In November, it stood at 9.11% compared to 8.2% during the same period a year ago. On the other hand, factory output has been in single digit since November 2010. It shrank by 5.1% in October.
Announcing its October policy, the apex bank had given guidance that the likelihood of rate action in the December mid-quarter review is relatively low. Friday’s announcement is in line with this guidance.
India’s benchmark Sensex was trading at 15989, up 90 points immediately after the announcement. The most-traded 10-year government bond, maturing in 2021, was trading marginally down at 8.4787%.
With the Reserve Bank retaining its status quo on rates, bank lending rates are likely to remain the same in the immediate future, analysts said.
“Banks have already responded to RBI’s rate actions in the past by increasing their rates. I do not expect any change in the deposit or lending rates in the immediate future,” Vaibhav Aggarwal, vice-president of research at Mumbai-based brokerage Angel Broking Ltd, said.
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First Published: Fri, Dec 16 2011. 12 24 PM IST