RBI governor. Y. V. Reddy (centre) with deputy governors Rakesh Mohan (right) and V. Leeladhar (left) in Mumbai on Tuesday. (PTI)

Mumbai, Jan. 29: The Reserve Bank of India (RBI) today left its key policy rates unchanged, preferring price stability over growth in the wake of high crude and food prices along with a liquidity slosh in the economy.

However, bankers feel there is scope for them to cut rates. Their assertions were based on comments on the net interest margin and the labour-intensive sector by RBI governor Y.V. Reddy in his press conference after announcing the rate status quo.

In the third-quarter review of its 2007-08 monetary policy, the RBI did not change the repo rate, reverse repo rate, cash reserve ratio and the bank rate.

The repo rate is the RBI’s short-term interest rate for loans to banks; the reverse repo rate is its short-term interest rate for borrowings from banks; the cash reserve ratio is that portion of bank deposits that has to be mandatorily kept with the RBI; and the bank rate is the normal lending rate for loans by the RBI to banks.

By keeping rates unchanged, the central bank disappointed those who had felt that India’s widening interest rate differential with the US and some moderation in growth would result in a cut in the repo rate, which now stands at 7.75 per cent.

Inflation worry

Though inflation is now below 4 per cent, the central bank said indications were getting stronger of inflationary risks in the period ahead.

It said: “Fuel prices, even if unchanged, are set to drive up headline inflation going forward, in contrast to their dampening role hitherto.

“In view of the new highs to which international crude prices have recently been lifted, the threats to domestic price stability have risen,” the RBI said.

At the press conference, Reddy said, “Inflation is broadly in line but not as comfortable that we lift our vigil on stability.”

Growth forecast

Forecasting an 8.5 per cent growth for the economy in 2008-09, Reddy said though growth had got moderated, it was largely on the lines expected by the central bank.

Besides crude oil, inflation would also be under pressure from firm prices of commodities and some manufactured items.

Other risks

There are other risks as well — from the liquidity slosh, with banks continuing to park money at the reverse repo window, and the increase in the rate of growth of money supply. The policy comes a day ahead of the US Federal Reserve meeting that is widely expected to cut interest rates again.

On the widening gap in the Indian and US interest rates, Reddy said last week’s cut in the interest rates by the US Fed was “a relevant input. But we will go by domestic considerations”.

Global cues

Global factors were relevant only to the extent that they impact domestic factors.

In its review, the RBI took note of global uncertainties and said despite the strong fundamentals of the Indian economy, there was always a possibility of a change in the course of capital inflows.

It said it would keep a tab on global developments and would take appropriate measures to mitigate risks.