The Reserve Bank of India today held repo rate, its lending rate, and banks’ cash reserve ratio, contrary to expectations of a cut, saying further reduction in the policy interest rate at this juncture could exacerbate inflationary pressures.
The repo rate stands at 8 percent and banks’ cash reserve ratio at 4.75 percent.
Taking note of the uncertainty in the global situation, especially euro area, the central bank said it has frontloaded the policy rate reduction in April with a cut of 50 basis points and noted that factors other than interest rates are contributing more significantly to the growth slowdown now.
As far liquidity conditions are concerned, there has been substantial easing due to open market operations, as is reflected in the stabilization of the overnight call money rate close to the policy repo rate.
The bank has assured of further OMOs as and when required.
Noting that though core inflation has stabilised, it expressed concerns over rising headline and retail inflation rates. These have a bearing on inflation expectations.
“Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” it said.
The bank, however, has increased the limit of export credit refinance to 50 percent of outstanding export credit of banks from 15 percent.
This move has the potential to release additional liquidity of over Rs 30,000 crore, which is equivalent to about 50 basis points reduction in the CRR, the RBI said.
India’s economic growth slowed to nine-year low of 5.3 percent in January-March and the factory output in April nearly stalled.
Industry and government had started clamouring for a rate cut to boost the economic activity after the release of these indicators. The expectation of a rate cut was tempered after the inflation in May accelerated to 7.55 percent year on year, from 7.23 percent in April.
The central bank had in April cut the policy rate by 50 basis points and indicated that more rate reductions were unlikely in the near future.