RBI keeps interest rates unchanged, signals downward trend

Mumbai, Mar 15 (PTI): With inflation remaining high, the Reserve Bank of India on Thursday kept interest rates unchanged, but made a promise that the cost of borrowing will come down in future. Amidst expectations of a pause in tight monetary policy, RBI Governor D Subbarao gave a firm signal that no further hardening of interest rates is required. However, the timing and size of the rate cuts will be determined by inflation, he said while unveiling the mid-quarterly review of the credit policy, a day before the Union Budget. The repo rate, the benchmark policy interest rate at which the RBI lends to banks, has been kept unchanged at 8.5 per cent. The cash reserve ratio (CRR), the portion of deposits banks need to keep with RBI, has been retained at 4.75 per cent. The CRR was reduced recently, on March 10, by 0.75 percentage points to infuse Rs 48,000 crore in the system to ease liquidity. "Recent growth-inflation dynamics have prompted the RBI to indicate that no further tightening is required and that future actions will be towards lowering the rate… However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions," Subbarao said, adding that suppressed prices of fuel, fertiliser and power pose risk to inflation in the economy. The RBI said the upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippages in government finances and rupee's appreciation. Inflation rose to 6.95 per cent in February, which is much above the RBI's comfort level of 5-6 per cent. The RBI said while there is a slowdown in economy, the GDP growth in the last quarter of the current financial year is expected to be better than the previous three-month period. The RBI policy, along with political uncertainty, dampened investor sentiment and the Sensex, the Bombay Stock Exchange benchmark index, had fallen by over 240 points at mid-day. The chairman of the Prime Minister's economic advisory panel, C Rangarajan, said the RBI will watch the inflation trajectory and a policy change will come only when there is a definite signal of decline in price rise. India Inc said RBI should reduce interest rates in the next policy to spur economic activity. "It is difficult for RBI to cut down rates, but industry would need to have a rate cut for investment pipeline. We should be strongly expecting a cut in the next review," the Confederation of Indian Industry's Director General, Chandrajit Banerjee, said. The RBI's decision to keep the policy rate unchanged is driven by the better-than-expected increase in growth numbers as well the rising inflation pressure on the economy. The RBI is scheduled to announce the annual credit policy for 2012-13 on April 17. Many analysts had expected the Governor not to take any major step in the Budget-eve policy announcement. Iterating its concerns on the fiscal situation, which saw sharp increase in government borrowing, the central bank said: "credible fiscal consolidation will be an important factor in shaping inflation outlook" which has key determinant of policy actions in the past two years. The RBI had been aggressively hiking policy rates to tame inflation. The apex bank has increased key policy rates 13 times, by a total of 3.50 percentage points, between March 2010 and October 2011. On systemic liquidity, which prompted the CRR cut, RBI said it will worsen further till March 16 as companies make advance tax payments.