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RBI keeps key rates unchanged; cuts GDP forecast for FY-14 to 5.5%

RBI lowered its FY14 GDP forecast to 5.5% from 5.7% earlier. RBI said that it can revert to supporting growth with continuing vigil on inflation.

Updated: Jul 30, 2013, 12.15 PM IST
RBI leaves Repo rate unchanged at 7.25%
NEW DELHI: The Reserve Bank of India (RBI) in its first quarter review of monetary policy kept both the repo rate and Cash Reserve Ratio (CRR) unchanged. This is in line with market expectations.

Maintaining an extremely hawkish stance, RBI also cut the GDP growth forecast for FY14 to 5.5% from 5.7% earlier. RBI Governor Subbarao cited various risks that are likely to hamper economic growth. Both domestic and global uncertainty were admitted to be a deterrent for economic recovery.

RBI said that it can revert to supporting growth with continuing vigil on inflation. The RBI will endeavour to keep inflation, which is under threat from a depreciating rupee, at 5 per cent by March end.

It also said that the recent liquidity tightening measures, taken to support the rupee, will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling it to revert to the policy of supporting growth with continuing vigil on inflation.

"The policy stance is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets," Subbarao said.

The effect of the Reserve Bank's recent interest rate increase and liquidity tightening to bolster the rupee will fizzle out if the government does not move to reduce external trade imbalances, a central bank policy review says.

Giving the policy guidance, the governor said "monetary policy going forward will be shaped by the consideration of supporting growth, anchoring inflation expectations and maintaining external sector stability."

The current situation of low headline inflation, prospects of softening food inflation on a good monsoon and decelerating growth warranted a pro-growth policy stance, but for the difficulties on the external front, as reflected in the almost 10 per cent depreciation in the rupee and the rising current account deficit, he said.

Stating that the external sector was the "biggest risk to macroeconomic stability," Subbarao called for urgent policy steps from the government to curtail the CAD to a sustainable level of 2.5 per cent of GDP and said that the RBI is ready to use all instruments under its command help in the efforts.

"It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring CAD down to sustainable levels," the Governor said.

The recent liquidity tightening measures, brought in to reduce speculative pressures on the rupee, which had hit a record low of 61.21 to the dollar on July 8, will be rolled back once the currency stabilises, which will lead to a shift in the monetary policy to be more accommodative and pro-growth, he added.

On inflation, while Subbarao acknowledged the ongoing rupee depreciation would create trouble for the price rise scenario, he stressed that the RBI will use all instruments at its disposal to contain it to 5 per cent by March.

Inflation as measured by wholesale prices increased marginally to 4.86 per cent in June.

The Governor termed the consistently high CAD, which came in at 4.8 per cent last fiscal, as a "formidable structural risk" leading to increased stress on balance of payments and reflecting rising external indebtedness.

Additionally, the Governor said the growing vulnerability in the external sector also "reinforces the importance of (the need to bring in) credible fiscal consolidation."

Subbarao said growth can be sustained in the medium term only on the back of low and stable inflation and he reiterated the need to ease supply-side constraints.

"Without policy efforts to address the deterioration in productivity and competitiveness, the pressures from wage increases and upward revisions in administered prices could weaken growth further and exacerbate inflation pressures," he said.

The second quarter monetary policy is scheduled on October 29, while the next mid-quarter review will be released on September 18.

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