RBI announces mid term review, no rate cuts

New Delhi, June 18 (ANI): The Reserve Bank of India (RBI) announced its mid term credit policy review here on Monday, and against the industry expectations, kept the short term lending rate and the Cash Reserve Ratio (CRR) unchanged at 8 and 4.75 percent respectively.

The RBI, that had last slashed policy rates in April, contended that further reduction in key rates would "exacerbate the inflationary pressures."

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the RBI said in a statement.

The central bank said that the government has failed to follow the path of fiscal consolidation it had called for in its earlier policy statement.

"The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives," the RBI said, suggesting that it was linking monetary policy to fiscal policy discipline.

The government has said that fiscal deficit will likely be at 5.1 per cent of gross domestic product in financial year 2013. he markets reflected the RBI's stance almost immediately-the benchmark Sensex at the Bombay Stock exchange (BSE) fell more than 100 points. The rupee fell to 55.57 against the dollar after having touched a day's high of 55.27 earlier in the day.

The RBI was expected to bring down the repo rate by at least 0.25-percentage point to 7.75 percent, and the Cash Reserve Ratio (CRR) by up to 1 percentage point.

Earlier this year, the RBI, in a radical departure from its 20-month rate hike spree, had reduced the CRR by 125 bps and the repo rate by 50 bps.

Following the latest GDP numbers, which showed that economic expansion has hit a nine-year low at 6.5 per cent in last fiscal, there have been incessant calls from the government as well as economists to give growth concerns a priority over the inflation. (ANI)