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Duvvuri stands by aam aadmi; India Inc fumes

Reserve Bank on Monday kept the key interest rates unchanged citing elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows.The repo rate at which the RBI lends to the system has been retained at 7.25 per cent, while the cash reserve ratio will continue to be 4 per cent.

'The monetary policy stance has been informed by the evolving growth-inflation dynamics, the balance of risks as well as recent developments in the external sector,' RBI Governor D Subbarao said in the mid-quarter policy review.

He specifically cited the decision of the US Fed to trim the growth stimuli in a phased manner and articulated concern over risks coming 'on account of uncertainty over policies of systemic central banks.'

The 22 May announcement has led to fund outflows from emerging markets, including India, and hence, depreciation in the rupee, which is already facing trouble over the high current account deficit, touching an alarming 6.7 per cent in the December quarter. To reduce the CAD to a sustainable level; the near term challenge is to finance it through stable flows,' the statement said.

In its guidance, the RBI, particularly, flagged risks on inflation, saying 'it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.'

The Central Bank had reduced key policy rate (repo rate) by 0.75 per cent during the last three monetary policy announcements. Though the headline inflation has come down, the RBI also sounded concerned over the persistently high food inflation, which has been hovering in the region close to ten per cent. 'Inflation has moderated as projected. However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects,' it said.

'Future monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation will evolve in the months ahead,' it added.
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