Not surprising this time around, the Reserve Bank of India (RBI) has kept the repo rate and CRR unchanged, signalling its intent to battle inflation, in its Monetary Policy Review announced today. The central bank has cut the SLR and maintained a hawkish tone.
The RBI has guided for lower growth rates and has indicated that GDP growth rates of 6.5% for 2013 and inflation at 7% by March 2013.
In the Macroeconomic and Monetary Developments First Quarter Review 2012-13, the RBI had said that even as the growth outlook remains weak, inflation is likely to be sticky during 2012-13.
"As such, inflation and macro-risks will condition growth-enabling policy actions with a view to supporting recovery in a non-inflationary manner. The near-term outlook on inflation continues to be marked by a number of upside risks, despite the significant slowdown in growth," the RBI had stated.
Clearly, the RBI has been unhappy with inflation at 7.25%, which is way above its comfort zone of 5%. What may have weighed on the minds of policy makers may also have been the fact that with deficient monsoons, there could be further spike in inflation, particularly food inflation.
The central bank by keeping rates on hold, also wants the government to do more by way of reducing the fiscal deficit and not depend on monetary policy alone.
Repo rates are the rates at which the RBI lends to banks and generally these rates signal the interest rate movement in the economy. By reducing the rates, there is general reduction in interest rates across the economy, making borrowings cheaper and signalling growth.