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RBI keeps rates unchanged, hints at rate cut in January

Mumbai, Dec 18 (PTI): The Reserve Bank of India on Tuesday kept the key interest rates unchanged but hinted at easing of rates in January saying that with decline in inflation, the focus of monetary policy would shift to removing impediments to growth.

Ignoring demands of the industry and the bankers, the RBI left the short-term lending (repo) rate and the cash reserve ratio (CRR) unchanged at 8 per cent and 4.25 per cent, respectively.

”In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards”, RBI Governor D Subbarao said in the mid-quarter monetary policy review.

The RBI is slated to announce the third quarter policy review on January 29.

The central bank is closely monitoring the evolving growth -inflation dynamics and would update projections for 2012-13 in the third quarter review, RBI said.

It said the biggest risk to outlook stems from global politico-economic developments, which could delay resolute policy action.

Referring to inflation, it said, while t the Wholesale Price Index (WPI) is showing some signs of moderation, retail inflation has continued to remain elevated. “The non-food component of the index also suggested persistent inflationary pressure”.

Looking forward, it said, “the emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months”.

The RBI said the overall WPI inflation has been below the central bank's projected level over the past two months.

The WPI inflation in November moderated to 7.24 per cent, but retail inflation remain elevated at 9.90 per cent.

Commenting on the policy, Chief Economic Advisor Raghuram Rajan said it is good that RBI sees room for rate cut.

”I think its good that RBI sees that there is room to ease. And clearly they are taking a decision keeping in mind that their main job is combating inflation. I look forward to good news in policy (January),” Rajan said.

The RBI said that since the Second Quarter Review in October, the global economy has shown some signs of stabilisation although the situation remains fragile.

It said that while activity is picking up in the US and the UK, near-term prospects in the euro area are still weak and there is no clarity as yet on how the US 'fiscal cliff' might be managed.

”While several emerging and developing economies are gradually returning to higher growth, weak external demand and contagion risks from advanced economies render them vulnerable to further shocks,” RBI said.

On the domestic front, it said, there are some incipient signs of pick-up though growth remains significantly below its recent trend. The industrial output growth bounced back to 8.2 per cent in October, 2012, against a contraction of 5 per cent in the same month last year.

The Indian economy grew by 5.4 per cent in the first half (April-September) of the current fiscal, against 7.3 per cent in the corresponding period last year.

The RBI in its second quarter policy review had projected the GDP growth for the current fiscal at 5.8 per cent. The Finance Ministry in its mid-year analysis has pegged the growth estimate between 5.7-5.9 per cent for 2012-13.

The RBI said though consumer price inflation remains stubborn, the pace of moderation in wholesale price inflation has been faster than anticipated.

”With food and manufacturing prices expected to edge down further, inflationary pressures may ease somewhat in the coming months,” it said.

On the bounce back of the October industrial output, the RBI said that it is “in large part, due to a low base and festival-related demand which propelled the growth of both consumer durables and non-durables into double digits”.

On the farm sector, RBI said that rabi sowing coverage is expanding steadily, improving the prospects of agricultural growth.

The RBI said non-food credit growth rose above the indicative trajectory of 16 per cent suggesting some pick-up in economic activity. However, the liquidity conditions have remained tight in the third quarter, it said. It said that to contain the liquidity deficit at reasonable levels, the RBI conducted open market operations (OMOs) on December 4 and 11, injecting primary liquidity of Rs 23,200 crore.

It said that oil imports resulted in widening of trade deficit in April-November period.

Even as capital inflows improved compared to second quarter, there were downward pressures on the rupee reflecting the large trade and current account deficits, it said.


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