RBI Maintains Status-quo on Rates, Focus Back to Inflation

Bangalore: For the second consecutive time, Reserve Bank Governor D Subbarao left the key interest rate unchanged to fight inflation, and lowered the growth projection for the current fiscal to 6.5 percent. 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 1-23 percent, effective from August 11. The key lending (repo) rate, at which banks borrow from RBI, has been retained at 8 percent 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 percent. "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 percent. RBI cut the GDP growth forecast to 6.5 percent from the earlier projection of 7.3 percent 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 percent, from 6.5 percent earlier. Stocks markets reacted negatively to the policy and the BSE 30-stock index, Sensex, fell over 71 points after it had trading 55 points up in the morning trade.