Inflation persists: RBI keeps interest rate unchanged at 8% and SLR cut by 1%.

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reserve bank of india rbiJuly 31, New Delhi: The Reserve Bank of India on Tuesday kept its interest rates unchanged at 8% for the second time since June, in line with expectations, while cutting its growth forecast and lifting its inflation outlook as economic conditions deteriorate. However, it cut the statutory liquidity ratio(SLR) by a percentage point to 23% to increase the flow of credit to industry.

“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” RBI Governor Duvvuri Subbarao wrote in the monetary policy review, adding the central bank’s primary focus remains inflation control.

The RBI’s hard line on inflation maintains pressure on Prime Minister Manmohan Singh’s government to rein-in populist subsidy spending and take steps to improve the investment climate by implementing long-pending reforms, such as allowing foreign direct investment in the supermarket and airline industries.

RBI, like all central banks, has the job to control inflation in the economy. Subbarao said that while large global and emerging economies are slowing down and witnessing a fall in inflation, India is an outlier.

“India is an outlier. The economic growth is slowing but inflation is still high. Lowering rates will aggravate inflation and may not stimulate growth,” he added.

He assured markets that RBI would respond to any shocks swiftly. “RBI stands ready to act swiftly to withstand global shocks,” he said.

The cut in SLR by 1 per cent to 23 per cent will give banks an incentive to buy government bonds. RBI has raised a concern about the rising government fiscal deficit.

“At current levels of the CAD and the fiscal deficit, the Indian economy faces the “twin deficit” risk. Financing the latter from domestic saving crowds out private investment, thus lowering growth prospects,” Subbarao said in his statement.

This clearly highlights RBI’s concern that an increase in the government borrowing could hurt RBI’s ability to stimulate growth. The cut in SLR will ensure that banks have enough money to lend to the government through purchase of government bonds without cutting any lending to major sectors that need money to stimulate growth.

RBI has cut the growth forecast to 6.5 per cent for 2012-13 from 7.3 per cent earlier. “Growth forecast was lowered due to deficient monsoon, weak industrial output and increased global risks,” Subbarao said.

The stock market reacted to RBI’s concerns over growth and inflation outlook. The 30-share BSE Sensex fell over 60 points or 0.6 per cent after the policy announcement while Nifty also slipped into negative territory after staying relatively flat before the announcement. Bank stocks fell sharply. The BSE Bankex fell 1.1 per cent.

“The Reserve Bank of India struck a hawkish stance in its monetary policy statement,” said Anubhuti Sahay, economist at Standard Chartered Bank. “Once again, containing inflation and inflationary expectations have been highlighted as the priority,” Sahay added.

“Today’s action was no more a surprise for the market. Further cutting down the SLR would have little impact on the overall systemic liquidity and would negatively weigh on the government securities market in the near term,” Shakty Satapaty, fixed income strategist, A K Capital, Mumbai said.

Public sector banks have a large exposure to government securities or bonds. Any negative impact on these investments could hurt profits.

News Gathered by India News

Posted by on Tuesday, July 31st, 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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