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With inflation on mind, RBI holds key rates

For the second consecutive time, the Reserve Bank of India (RBI) governor D Subbarao on Tuesday left the key interest rate unchanged to fight inflation, and lowered the growth projection for the current fiscal to 6.5 per cent.

However, as a liquidity inducing-measure, the governor brought down the Statutory Liquidity Ratio (SLR) – the amount of deposits banks park in government bonds – by 1 per cent to 23 per cent, effective from 11 August.

The key lending (repo) rate, at which banks borrow from RBI, has been retained at 8 per cent despite demands from the industry to cut interest rates to spur economic growth.

The Cash Reserve Ratio (CRR) – the amount of deposits banks keep with RBI in cash – has also been retained at 4.75 per cent.

‘The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term...lowering policy rates (now) will only aggravate inflationary impulses without necessarily stimulating growth,’ Subbarao said in the first quarter monetary policy review.

Its move to lower the SLR may not be effective as banks' average SLR holdings is already around 30 per cent.

RBI cut the GDP growth forecast to 6.5 per cent from the earlier projection of 7.3 per cent in view of the ongoing global economic slowdown.

Taking note of the deficient monsoon rains and subdued prices of petroleum products, it raised its fiscal-end inflation projection to 7 per cent, from 6.5 per cent earlier.

The headline or Wholesale Price Index-based inflation in June was 7.25 per cent, while at the retail level it was at an alarming 10.02 per cent. The pro-growth lobby, which is worried over the growth slipping to nine-year low of 5.3 per cent in the January-March quarter, wanted RBI to bring down the high-rate structures to induce faster economic expansion.

RBI has refused to give-in to the demands, saying that ‘in the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth’.

In its earlier mid-quarterly review on 16 June, RBI had kept the policy rates unchanged to combat high inflation.

RBI flagged external risks emanating from the Euro area and ‘fiscal cliff’ in the US, uncertainties on commodity prices, deficit monsoons 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.


RUPEE DECLINES ON HAWKISH STANCE BY RBI

In a volatile trade, the rupee depreciated further by seven paise to close at 55.65 against the US currency on sustained month-end dollar demand from importers amid hawkish stance taken by the apex bank in its first quarter monetary policy today.

However, weakness in dollar overseas, renewal of capital inflows for the second day in a row and strong local stocks limited the rupee fall to certain extent, a forex dealer said. The rupee opened higher at 55.40 a dollar from previous close of 55.58 on firm local eqities and weakness in dollar in Asian markets at mid-session.

Later, the rupee touched a low of 55.85 before recovering some ground to settle lower at 55.65.
The benchmark sensex ended up by over 92 points to close at 17,236.18 points.
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