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RBI abstains from cutting rates
Mon, Jun 18, 2012
Source : Team Citrus Interactive

Dashing widespread expectation among market participants of a rate cut, the Reserve Bank of India (RBI) decided to leave key policy rates unchanged. The benchmark repurchase (repo) rate was left unchanged at 8 per cent. The cash reserve ratio (CRR) also remains at 4.75 per cent.
 
In a recent survey of economists conducted by Bloomberg, most had expressed the hope that rates would be cut by 25-50 basis points (one basis point is one-hundredth of a percentage point). While slowing economic growth (GDP growth for Q4FY12 came in at a nine-year low of 5.3 per cent) and low IIP number (up a meagre 0.1 per cent in April 2012) appeared to be tipping the balance in favour of a rate cut, in the final analysis, stubbornly high inflation (May WPI inflation came in at 7.6 per cent) seems to have weighed more heavily with RBI governor D Subbarao.

In its statement, the central bank said: “While growth in 2011-2012 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend.” CPI inflation rose 10.36 per cent year-on-year in May. The central bank has however assured that it will monitor external and domestic developments closely, and will use all available instruments to tackle any adverse developments (a reference to both the unfolding Greek crisis and slowing domestic growth).

On April 17 this year, the central bank had last cut the repo rate by 50 basis points, bringing it down from 8.5 per cent to 8 per cent. Prior to that rate cut, the central bank had been on a rate hiking spree between March 2010 and October 2011: it raised interest rates 13 times (by a cumulative 375 basis points) to tackle persistently high inflation.

 
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